I’m not all that sophisticated an investor and mostly I am in mutual funds for the long-term. But I do buy stocks and have been kind of successful selling stocks when I get to a 20% gain and buying more share if they fall 20%. To do this I use a lot of limit orders. If I buy a stock at $100/share, I can put in a sell order that day for $120/share and a buy order for $80/share. If the price falls 20% I automatically buy more. If it goes up, I automatically sell. I like this because it keeps me from getting greedy and I don’t have to watch the market all day (or at all).
I bought some Goldman Sachs like this and when it went down 20%, I bought more, which I then sold when it went back up. Goldman has been on a yo-yo, so I’ve been able to buy and sell three times for a 20% profit each time. But I didn’t reach a 20% gain on the original shares until recently. My intention was to hold on to GS because I felt like its long-term outlook was very good and it could make a lot more than 20%. Still, it could also zoom right back down. Today it was up quite a bit and I’m into the 30% gain range. I didn’t want to sell if it would go up some more, but I don’t think I want to allow it to get below my 20% gain mark either.
So for the first time I am using a “trailing stop”. This sets a sell price a certain amount below the current price and the sell price adjusts upward as the stock price goes up. For instance, today GS was up to $105/share. So I entered a 5% trailing stop meaning if it goes down 5%, I will sell (basically at $100). However if the price were to go up to $110, the new sell price would be 95% of that, $104.50. If it goes up steadily forever, I will never sell. But if it goes down 5% at any time, the shares will sell. They could sell tomorrow.
What’s worse, if the stock market futures go down tomorrow morning before the market opens, Goldman Sachs might open at $90/share and, because that is at least 5% below my target price, the shares will be sold instantly at $90.
So there is risk all over the place. First, there is a risk the stop could trigger below my set price. Second, there could be a 5% blip downwards tomorrow before the stock goes back up again, and I would have sold and missed the rebound. Third, I could have sold the stock today at $105 and been done with it. So if the stock sells below $105, then I haven’t really gained anything at all by using a trailing stop. If I can somehow beat that price, then I might become a fan of trailing stops.
If the price goes up another $10 or so, I could change to a 10% trailing stop so that the shares wouldn’t sell on a volatile day.
I’ll let you know how this works out.
Sure enough, it sold today. After going down a couple of percent and hanging around $101 all day, there was a drop at the end of the day and, 20 minutes before the closing bell, my price must have triggered. Interestingly, the sale price was above the trigger, so it must have bounced back up to $100.46. It closed at $99.30, so maybe I did okay. I wound up with a 27% gain instead of the 31% gain I could have had pretty easily by selling this morning.