Use this one trick and you’ll never need to worry about your stock again!
There’s a special trick you can use to always sell a stock near its peak.
And it’s something used by one of history’s greatest investors – Martin Zweig. This trick helped him bag a return of 15.9% on average every year for 15 years in the US market.
It’s called a ‘trailing stop-loss’.
To understand this, you need to know what a stop-loss is.
Investors use stop-losses for one simple reason: If your stock doesn’t rise as you’d hoped, stop-losses limit your potential losses.
Basically, it’s an order placed with your broker, to sell a stock when it drops below a certain price level. Usually, this stop level is based on a percentage of your purchase price.
So let’s say you buy a share for R100 and set your stop-loss at 20%. If the share drops below R80, your broker will immediately sell your shares. But if it doesn’t go below this level, nothing will happen.
But in a bull market, if you use a regular stop-loss, you’ll leave money on the table.
That’s why you need a trailing stop-loss.
You see, a regular stop-loss is based on the value of your purchase price. A trailing stop, however, automatically adjusts your stop-loss so that it continues to move up as the price of your stock rises.
For example, let’s say you buy a share for R100. You set your trailing stop-loss at 20%. When your share rises to R200, your stop-loss level would move up to R160 (20% of R200 = R40, and R200 – R40 = R160).
This means you’ve now locked in gains of R60 per share – Even if your shares fall below R160.
So when you use a trailing stop-loss, you’re taking some of your profits off the table - Money that you know is in the bag. Without it, you’re shares are in free-fall!
So at what level should you set your trailing stop-loss?
It really depends on how much risk you’re willing to take.
If you’re a conservative investor, you should place your trailing stop-loss at 10%-15%.
A moderate risk take would set the level to 15%-25%.
And, if you’re an aggressive investor who has a longer time frame and doesn’t panic over short-term losses you should set your trailing stop-loss level at 25%-35%.
In the Stock of the Month newsletter I set the trailing-stop loss level to 25%. This method has allowed us to almost always bank winners. In fact, over a three and half year period, we’ve only made losses on two shares!
So after you’ve bought your stock, simply tell your broker your trailing stop-loss level and you’ll always sell the share near its peak!
Thrive in your possibilities,