Founder of TradeStops.com, Dr. Richard Smith explains one of the most important aspects of investing. And one most investors aren't even aware of…
Logically, you set a stop loss at a level that leaves you with risk you can tolerate.
But the thing is, not all stocks are made equal. For example, penny shares could soar 30% in one day, while large-caps gradually increase 5% a month.
The perfect stop-loss with a twist
Well Dr Smith analysed the portfolios of various investment newsletter editors. And in almost every case, stop losses improved portfolio performance substantially.
But there was more to his study…
Dr. Smith explains that, "Not all stocks are created equal. Some are volatile and some aren't. You don't want to get stopped out of a volatile stock because you set your stop loss too tight. And if you put your stop loss too loose on a stock without much volatility, it won't serve its purpose."
So he turned his attention to the common stop loss and added his own special twist to it and called it the "smart stop".
Smart stops are tailored to an individual investment.
This formula varies from setting as little as 10% for blue chip stocks
to as much as an 80% stop loss for riskier small-cap investments.
So if you’re a penny share investor
; you can set a bigger stop loss to compensate for the volatility. This will ensure you don’t sell too soon.
Bill Bonner gives an example of how a smart stop worked using Stansberry & Associates Analyst Steven Sjuggerud True Wealth portfolio.
"Putting $1,000 into each of Steve’s recommendations since 2000 produced about $30,000 in profit by 2014. Adding a simple 25% trailing stop turned the $30,000 into about $50,000. But by using "smart stops", it raised that amount to $55,000."
That's an extra $5,000 in the bank all using one simple tool.
Smart stops give you the best opportunity to let your winners run!
Until next time,
Always remember, knowledge brings you wealth,