The Right Time to Change a Stop Loss
Brian Hunt, editor in chief, Stansberry Research
November 23, 2009
Why did you change your stop loss?
As a financial publisher, I've heard this question over 100 times.
You see, many of our readers understand the importance of stop losses – predetermined points at which you sell a stock to protect capital or lock in profits.
Stansberry Research often recommends a 25% "trailing stop loss," which is a stop loss that moves higher and higher in lockstep with a rising stock. Say you bought a stock at $10 and rode it to $40. Your trailing stop here would kick you out of the position at $30 (25% of $40 = $10, $40 – $10 = $30).
But sometimes we throw a wrinkle in our advice. Several times in the past, we've recommended folks "tighten" their trailing stops on big winners to 15%. Naturally, when we depart from our most common strategy, folks want to know why. Here it is...
Tightening the stops on your big winning trades allows you to keep more of the gains. This is often the case when you buy an asset cheap, make a great return on it for a year or two, and then watch it get expensive as folks pile into your idea.
If you're nervous about holding that expensive asset, consider tightening your original 25% stop loss to 15%, or even 10%. Here's an example of how this can benefit you...
Let's say you bought a gold stock at $2 per share. You bought 5,000 shares for a $10,000 outlay. You placed a 25% trailing stop loss on the position to protect yourself. This stop loss is wide enough to keep you in the stock in case it declines a bit before going higher.
The months go by... and congratulations! Your $2 stock jumps to $10. Your stake is worth $50,000 now.
Let's also say you're getting nervous about the expensive valuation of the company... or you're nervous gold stocks have become too popular with the investment crowd. You want to ride your winner as far as you can, but you also want to be sitting close to the exit when the movie ends.
If you stick with your current stop loss of 25%, you'll sell your stock if shares close below $7.50. In this situation, you'd sell and walk away with a stake worth $37,500 ($7.50 times 5,000) and a profit of $27,500 ($37,500 minus your $10,000 outlay).
If you tighten your stop loss to 15%, you'll sell your shares if the stock closes below $8.50. In this situation, you'd sell and walk away with a stake worth $42,500... and a profit of $32,500. That tighter stop loss means $5,000 in extra profits. An even tighter stop loss of 10% would mean total profit of $35,000.
Again, tightening a stop loss can be a great idea on your big winners. It's a good way to get your seat closer to the exit if your asset grows expensive and popular... but keep you in the trend if the gains continue.
And as you can see, it can make a difference of thousands of dollars.
Good trading,
Brian Hunt
P.S. Remember... as I mentioned in this essay, there's nothing magical about picking 25% as a stop loss point. It's simply a good middle-of-the-road stop loss point. Some traders use 8%... 15%... or 33% stop losses. |
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D.R. Horton plummets 14% on Friday... second-largest U.S. homebuilder's losses still mounting. |
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Soft drink giant Coca-Cola hits a fresh high... up 18% since August. |
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Health care stock fund XLV hits new highs... up 8% in November. |
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Earnings today... Campbell Soup, Hewlett Packard, Tyson Foods. |
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Last |
Change |
52-Wk |
| S&P 500 |
1109.30 |
+1.45% |
+27.03% |
| Oil (USO) |
40.29 |
+2.99% |
-12.75% |
| Gold (GLD) |
111.63 |
+1.72% |
+52.29% |
| Silver (SLV) |
18.01 |
+5.01% |
+92.41% |
| U.S. Dollar |
75.37 |
+0.68% |
-13.15% |
| Euro |
1.49 |
-0.70% |
+17.54% |
| VIX |
22.89 |
-2.01% |
-65.48% |
| HUI |
475.53 |
+3.26% |
+155.07% |
| 10-Year Yield |
3.33% |
-0.10 |
-0.37 |
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| Company |
Sym |
Industry |
Centurytel |
CTL |
telecom |
Alliance Holdings |
AHGP |
mineral mining |
Impax Labs |
IPXL |
pharma |
Intl Tower Hill |
THM |
gold mining |
Bon-Ton Stores |
BONT |
dept stores |
Alloy |
ALOY |
marketing svcs |
Pfizer |
PFE |
Big Pharma |
Sara Lee |
SLE |
packaged foods |
Dress Barn |
DBRN |
clothing stores |
DG FastChannel |
DGIT |
advertising |
Insulet |
PODD |
medical supplies |
Agilysys |
AGYS |
outsourcing |
Netlist |
NLST |
semiconductors |
Merck |
MRK |
Big Pharma |
Terra Industries |
TRA |
fertilizer |
Medivation |
MDVN |
biotech |
GenCorp |
GY |
conglomerate |
iRobot |
IRBT |
appliances |
KMG Chemicals |
KMGB |
chemicals |
Pro-Fac |
PFACP |
fertilizer |
Coca-Cola |
KO |
soft drinks |
J. M. Smucker |
SJM |
packaged foods |
GSI Commerce |
GSIC |
online commerce |
ION Geophysical |
IO |
technical devices |
China Green Ag |
CGA |
fertilizer |
Otelco |
OTT |
telecom |
Starlims |
LIMS |
software |
DIRECTV |
DTV |
satellite TV |
Clear Channel |
CCO |
billboards |
SkillSoft |
SKIL |
software |
ZOLL Medical |
ZOLL |
medical devices |
Jinpan Intl |
JST |
electronics |
CAI Intl |
CAP |
shipping |
Insignia Systems |
ISIG |
marketing svcs |
Wipro |
WIT |
outsourcing |
King Pharma |
KG |
pharma |
Jo-Ann Stores |
JAS |
fabric stores |
Rehabcare |
RHB |
hospitals |
City Telecom |
CTEL |
telecom |
China Marine |
CMFO |
packaged foods |
Kimber Resources |
KBX |
gold mining |
Best Buy |
BBY |
gadget stores |
Williams-Sonoma |
WSM |
home furnishings |
|
| Company |
Sym |
Industry |
China Ritar Power |
CRTP |
industrial equip |
Seahawk Drilling |
HAWK |
oil & gas drilling |
TranS1 |
TSON |
medical supplies |
Vitacost |
VITC |
health websites |
Invitel Holdings |
IHO |
telecom |
Univest |
UVSP |
bank |
Guaranty Bancorp |
GBNK |
bank |
American Van |
AVD |
fertilizer |
Smithtown |
SMTB |
bank |
Citizens & North |
CZNC |
bank |
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