How to Track Trailing Stop Losses

Today I want to discuss trailing stops. If you have any experience with investing or trading, you are surely aware of stop loss orders. However, this is not exactly what I am talking about.

I want to show you how to track trailing stops. I will illustrate. You buy stock X for $100 and track a trailing stop of 10%. This means if X goes to $90, you sell and book a $10 loss. Of course no one wants to lose, but keeping track of your losses and cutting them early will eliminate emotion from your trading and protect you from a catastrophic loss. With a trailing stop, the 10% moves up as the price of the stock increases. So if X goes to $150 then you sell at $135. Thus locking in your profit at a minimum of $35.

It is really quite easy to do this. I personally just use an excel spreadsheet. I enter the stock name, symbol, purchase price, and high price. Then in the next column I enter my trailing stop of 25%, 15% or 10%, depending on the stock. I use a formula that autmatically gives me my sell price. At least 2-3 times per week, I look at the closing prices of my stocks and adjust. If a stock makes a new high, I adjust my high price. If it closes below my sell price, I enter a sell order for the next day. It took about 30 minutes to create the original spreadsheet with the formulas and about 5-10 minutes to update. I consider this time well spent.

You will also need to consider your dividends when tracking your trailing stops. If the stock is trading at $50 and it pays a $1 quarterly dividend, then the stock will drop by approximately $1 on the ex-dividend day. Keep in mind that each time you are paid this $1 dividend, this reduces your cost basis by $1 and thus should lower your high price by $1. This way you don't get stopped out of a stock too early due to a dividend payment.

You may ask, "why don't I just enter the trailing stop order with my broker?" It is true that most brokers now will allow you to enter a trailing stop loss order and just not worry about it any more. I would never, ever enter any type of stop loss order with my broker. The market makers are there to take advantage of you. If you enter a 10% trailing stop order in with your broker on a stock that cost $50, the order is in the system to sell at $45. If the stock drops to $45.50, market makers can push the price down to $45 to buy your shares and almost immediately the price can run back up. I have personally experienced this and it taught me my lesson.

I used to think with high volume stocks, I could enter my trailing stop orders with my broker and just forget about it. Once I had a stock trading at about $340 per share and my trailing stop order was approximately $312. One morning my shares were sold at EXACTLY my trailing stop order price, TO THE PENNY. To the penny!!! And within minutes the stock was back trading at around $330 per share. Lesson learned.

The point is you need to take control of your trading and not let someone else decide when you sell. It is important to have an investment strategy. This strategy involves both the price you pay AND the price you sell. If you establish this in your strategy, you eliminate the emotion from your investments. Trailing stops has been one of the most important things I have learned in my investing career and I hope you will employ this strategy as well. Happy trading.