With the recent wild gyrations in the stock market, and at least a short-term shift to momentum being the end-all-be-all in the market, you may have some positions that recently ran up and you’re sitting on some nice unrealized gains. That’s great!
But what do you do? You definitely want to maximize your profit, so you don’t want to sell now and watch the now-closed position move on to even higher highs. But one thing you don’t want to do is watch your gains evaporate. I suggest setting a rather tight trailing stop loss on 1/2 of your position. For example, let’s say you recently bought 200 shares of ABC Cryptowidget Company at $40. Well, ABC is a crypto-something company and is now trading at $90 just three weeks after you purchased it. ABC could go to $200, or it could go to $25. What do you do?
You could set a stop-loss order for 100 shares at $80/share. A stop loss is a sell order below the current market price that turns into a market-sell order if the stock trades down to the stop loss amount. So, if ABC does retrace back down to $80, you will sell 100 shares at the market price.
Well, that makes sense, so why not do that with the full position of 200 shares? Simple – you don’t want a temporary retracement to take you out of your position, and then the stock continue upwards. For example, if ABC goes from $90 down to $76, and then on to $200, you will be completely out at $80/share. We don’t want that, and retracements are very common, even on high-flier stocks. So, give the other 100 shares a bit more room to allow for a temporary retracement.
That said, don’t let the first 100 shares drop all the way back down to your original purchase price, or even lower. So, set a $65/share stop loss for the second 100 shares. That way, you’ve given it more room to move. And yes, the stock could retrace all the way down to $65, stop you out and sell your second 100 shares at $65/share, and then power all the way back up to new highs. That’s the risk of the market. But you never go broke taking gains.
In gambling, it’s called “taking money off the table.” And I’m not comparing the stock market to gambling. If anything, I’m saying that even in gambling, smart money management is part of the equation.
DECADES to Wealth 