To improve your investing success use a ‘safety switch’

Fsp Invest, 26 Sep. 2013

Tags: investing success, safety switch, losses, winners, stop loss, trailing stop

Anyone can buy a share. The real art of investing is knowing when to sell. You could rely on point-and-figure charts or tarot cards or Elliott Waves. But instead you could adhere to a time-tested trailing stop strategy. That means you don’t buy a share without knowing in advance exactly where you’ll get out. Read on to find out how to improve your investing success using a ‘safety switch’…

By using a trailing stop strategy, you take the guesswork out of investing, the team of experts at Investment U explain…

A trailing stop strategy protects both your profits and your principal.

Let your winners ride

Start all of your trading positions with a sell stop 25% below your execution price. As the share rises, you raise the trailing stop.

In other words, if you buy a stock at R20, your stop loss is at R15. When the share hits R32, your stop loss (still trailing at 25%) will be at R24.

As long as the share keeps trending up, you’re happy to hang on. If the share pulls back 25% from its closing high, you sell. No questions asked.

And cut your losses early

You protect the profits you’ve earned on the way up and also protect your principal when things go awry.

Everyone knows you should cut your losses early and let your profits run. But very few investors actually do it. But a ‘safety switch’ guarantees that you do.

During the bull market of the 1990s, many investors watched as their share portfolios grew bigger and bigger.

There was only one problem. They never took any profits. They had no sell discipline whatsoever.

So when shares started tanking, they watched many of those profits evaporate entirely. Some even turned into losses.

Other investors then bought shares early in the ensuing bear market with high expectations. And it devastated investors to see those shares drop to levels they never would have imagined.

In both cases, the fault was the same: They failed to have a sell discipline.

Investors without one are flying by the seat of their pants. And that rarely ends in award-winning results. It’s simply not a practical means to build wealth.

Bottom line: Use a trailing stop on all your individual stocks and have the gumption to stick with it.

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