Trading Strategy: Using Trailing Stops

Trailing Stops can Limit Risk and Lock In Profits

Trailing stops are a great trading strategy that uses stop loss orders. Simply put, as the price of the stock goes up, your trailing stop will also go up. The trailing stop prices are set at a certain percentage (%) below the current price.

As the price of the stock goes up, the trailing stop will also go up. The stop follows, or trails, the stock price, giving us the name “trailing stops”.

Only Raise Your Trailing Stop – Never Lower It!

The advantage of using trailing stops is that you only raise your trailing stop price. You never lower your trailing stop!

Why do you only raise trailing stops? You want to only raise your trailing stops to reduce risk and lock in profits.

Examples of Using Trailing Stops

Here are examples of trailing stops in action.

You buy XYZ stock at 10.00. In this example we will set our trailing stop price at 10% below the current price. Our initial trailing stop will be 9.00. How did I get 9.00? Take 10% of 10.00 to get 1.00. We’ll set the initial trailing stop at 1.00 less than the current price of 10.00. Subtract 1.00 from 10.00 to get 9.00. If the stock price hits 9.00, our trailing stop will sell our position.

Scenario: Stock Moderately Decreases in Price – XYZ stock declines in price! If XYZ declines in price to 9.50, you will not alter your trailing stop – do not lower your trailing stop order price!

Scenario: Stock Sharply Decreases in Price – XYZ is falling fast! First it hit 9.50, then kept dropping and now it is approaching 9.00. When the price of XYZ hits 9.00, our trailing stop will automatically sell the stock. We will have lost 10% of this trade’s value. Keep in mind that this is 10% of only this trade, not 10% of our total portfolio value. We knew we were risking 10% of our money in this trade. This risk is money we were willing to lose. If XYZ keeps falling to 8.00, we’ll be protected thanks to our trailing stop – we will have sold this position (at a loss) at 9.00. Our risk was limited to 10%. If we didn’t have a trailing stop in place, we would currently be down 20% on this trade – 10.00 price falling to 8.00 is 20% decline.

Scenario: Stock Moderately Increases in Price – XYZ stock increases in price! If XYZ stock prices goes up to 11.00, we will alter our trailing stop. The new trailing stop price will be 10% below 11.00. First calculate this price by taking 11.00 * 10% (10% is the same as multiplying by .10). So we have: 11.00 * .10 = 1.10. Second we will calculate the current price of 11.00 minus 1.10. We’ll set our trailing stop price at 11.00 – 1.10 = 9.90. If XYZ stock hits 11.00, our trailing stop will be 9.90.

Scenario: Stock Sharply Increases in Price – XYZ shoots up to 15.00 per share. We’ll have to calculate a new trailing stop price, again 10% lower than the current price. First calculation: 15.00 * 10% (or .10) = 1.50. Second calculation: 15.00 – 1.50 = 13.50. Our new trailing stop price is 13.50. The return rate from 10.00 to 13.50 is 35%! We’ve just locked in 35% in gains. If XYZ hits 13.50, our trailing stop loss order will automatically sell XYZ at 13.50. If XYZ falls to 9.00 per share, we won’t care. We’ve locked in profits and our trailing stop sold our positions for us.

Trailing Stops Reduce Risk

Trailing stops reduce risk by setting an absolute minimum price and monetary value you are willing to risk and possibly lose. For simplicity I will use a trailing stop price of 10% below the current stock price. The trailing stop price you use depends on your trading style, strategy, and amount of risk you are willing to accept. Some people may want to set a trailing stop at 5% below the current price, while others use upwards of 20% below the current price.

Keep in mind that some stocks are volatile and may fluctuate 5% to 10% in price per week. If your trailing stop is set at 5% below the current price, and the stock falls 5% shortly after you buy it, your trailing stop will execute and sell your stock position at a 5% loss. However, if your trailng stop is set at 10% below the current price, the stock price can initially fall 5%, then the stock price may shoot back up. Volatile stocks require careful research and analysis before you determine the trailing stop percentage to use.

Trailing Stops Lock In Profits

Trailing stops lock in profits or reduce losses when the price of the stock goes up. As the stock prices increases, your trailing stop price also increases.

If the stock continues increasing in price – say 20% above the price you purchased at – your trailing stop will lock in 10% in profits. If the stock continues climbing and hits 40% above the price you bought it, your trailing stock will also climb, locking in a 30% gain! When the stock finally declines in price, your trailing stop will sell your position, locking in a gain of 30% profits for you.

Use Trailing Stops!

Everyone should use trailing stops. They benefit you in two ways: reducing risk and locking in profits. Trailing stops are a very important and useful tool available to traders and investors, but many traders do not use them. If you plan on being a successful trader or investor, trailing stops are an easy way to increase your profits and your chances of success.

Introduction to Risk and Risk Management


Risk is the amount of money you are willing to, and could possibly, lose if your trade or investment is not successful.

Risk Management

Risk management is the planning and strategy developed to reduce your risk – or the amount of money you might lose – in the stock market.

Some people say you should only risk 1-2% of your entire portfolio per trade. This means you are only willing to lose 1-2% of your entire portfolio.

Example of Risk Management

Your entire portfolio value is $10,000. The stock you want costs $2 per share, and you want to buy 1000 shares. Total cost to purchase the 1000 shares is $2000 (not including commissions).

Risking 1% of your entire portfolio value: You will risk 1% of your entire portfolio, or $100 dollars. The share price you should set a stop loss at, with 1% risk, is 1.90 per share.

Risking 2% of your entire portfolio value: You will risk 2% of your entire portfolio, or $200 dollars. The share price you should set a stop loss at, with 2% risk, is 1.80 per share.

Trading Strategy: Creating a Stock Trading Plan

What is a Stock Trading Plan?

Key to Success A stock trading plan is a strict set of rules and actions which formulate your stock trading strategy. A stock trading plan defines when to buy and sell stocks and at what prices. Every trade you make should be governed by your trading plan.

A stock trading plan is very similar to a company Business Plan. A Business Plan is a device for the owner which sets out how the company intends to operate the business. A business plan is also a road map to tell investors and others how you expect to get there. A business plan covers all aspects of the company, from overall strategy and marketing to finances and the company’s goals. In the same fashion, a trading plan lays out how the trader will make trades – the time, price, volume, and news are all essential components of the trade. While your trading plan may not necessarily be for others, it is still your own road map to tell yourself, and reaffirm to yourself, how you expect to get there. Include goals in your business plan: 3 month, 6 month, 1 year, 2 year, 5 year, 10 year, and even 20+ year goals you would like to reach through your trades and investments.

Trading Criteria to Consider

There are many things you need to consider and think about when creating your trading plan. Here are a short few your trading plan should cover. Any additional criteria you can think of should be included.

  • When to enter a trade (buy a stock) – timing.
  • Price when buying a stock.
  • Current news about the stock.
  • Liquidity of the stock. Liquidity is the ability to buy and sell stocks at the volume you want, when you want, at the price you would like.
  • How long to hold the stock.
  • When to sell if the stock price goes up.
  • When to sell if the stock price goes down.
  • What to do if the price does not move. Hold the stock longer? Sell the stock?

Trading Plan Essentials

There are many essentials you should include in your business plan. These essentials lay the foundation of your plan and will help you reach your goals. Here are some essentials you should include. Again, if you have other essentials please leave a comment so others can build on your information or contact me so I can include them in future versions of this article.

  • Statement of Purpose

    • Why do you want to trade and invest in the stock market?
    • What do you hope to gain from trading?
    • What are your trading goals?
    • How do you plan on becoming a better trader?
    • How are you going to use your trading plan?
    • Clearly define your purpose for trading and investing.
    • State your goals and what you hope to gain and achieve through trading.
  • Strategy for Buying

    • How are you going to find stocks to trade? Examples: screener, news, research, technical analysis, fundamental analysis, etc.
    • How will you refine your “buy list” (stocks on your radar you are considering buying)? Examples: valuation, screening further, great news, great earnings, strongest technicals, strongest fundamentals etc.
    • What price are you willing to pay? Sometimes the current price may not be the best price for buying. Will you wait for a better price? Move to the next stock in your list?
    • Does the stock have good volume? Very low volume history means you may not be able to sell the stock at the price or time you want. Keep this in mind. High volume means high liquidity and are generally easier to sell and more actively traded.
    • Using Technical Analysis: make sure you absolutely understand how the technical analysis indicators you use work. Your favorite indicator may not be useful in many situations. You must know when to use technicals and when not to use them.
    • Using Fundamental Analysis: again, make absolutely certain you understand how fundamentals work. This means reading through past earnings reports and the company’s balance sheet, income statement, and cash flow statement. Sometimes a stock will have great fundamentals but will not move in the direction you expect due to other factors, such as news, or future outlook.
  • Strategy for Selling

    • Set a desired minimum goal for each trade. You may be happy making $50 per trade. Or $500 per trade. Set a price goal you are happy with making from selling the stock. Don’t be angry if the price goes up after you sell. You can’t see the future and mentally it can be unhealthy for you to second-guess yourself. Set a minimum desired goal and stick to it.
    • Use Stop-Loss Orders to reduce risk by automatically selling at a pre-determined lowest price. Read more about stop loss orders: Using Stop Loss Orders to Reduce Risk
    • After you buy the stock, what is the lowest price you are willing to sell at?
    • How much are you willing to lose if this trade goes bad?
    • Most traders are willing to risk or lose 1% – 2% of their entire portfolio value per trade. Example: Your entire portfolio value is $10,000. On this trade you use $1,000 to buy. At 2% risk, you are willing to lose $200 of your $1,000. The stock price can fall 20% before this 2% loss dictates selling.
    • Will you sell the stock immediately, before your stop-loss price is met, if other factors arise? Such factors may include poor earnings, weak or declining market, market corrections, poor news, lost contracts, etc.
    • When will you sell the stock if the price rises and continues to rise?
    • Some traders set a specific goal, perhaps 10% gain or 25% gain, and then they will automatically sell.
    • Some traders continually raise their stop-loss prices as the stock price climbs. This is called trailing stops or raising stops and can be a very useful tool for locking in gains and reducing risk. I use trailing stops.
  • Strategy for Holding

    • What will you do if the stock price does not move at all after you buy? Sell it and move on, or hold it and wait for action?
    • Some traders will hold on to the stock until more activity and volume pick up. They are comfortable waiting it out. This action may require more capital in your trading account, as you may have to hold on to more than one non-moving stock.
    • Some traders will sell a stock that does not move after a very short time period – perhaps minutes, hours, or a couple days. These traders like to move their money to move active or lucrative stocks on their list. They may not feel comfortable holding this stock for a length of days, weeks, or months.
  • Money and Risk Management

    • How will you keep your risks to a minimum?
    • How will your keep your total account value at a maximum and grow it?
    • Research money management techniques – there are many. This can include how much money or what percent of your entire portfolio value to use in each trade.
    • Research trading risk management techniques – again there are many. This can include how much money or the percent of your entire portfolio you are willing to lose, and may lose, in each trade.
    • Keep extra cash available in your account. You will see many opportunities but you must be prepared to take advantage of them. If you have little or no available cash, you will not be able to execute this trade. You may want to have 10% – 20% of your entire account value available.
    • Margin: margin can be a very useful tool for many traders, but can be scary and risky if not used properly. You can get a margin call from your stock broker at any time, which means they want to collect their money now. Margin gives you extra buying power. Margin also gives you additional risk. Use margin cautiously and wisely. Some traders do not use margin at all.

Inspiration For Your Stock Trading Plan

Luck is When Preparation Meets Opportunity

This is one of my favorite quotes which is very inspirational to me, not only in my trading and investing, but also in my everyday life. This is also one of Oprah’s favorite quotes. Look how successful she has been!

For a trader, the preparation means making your plan, developing your strategies, testing your techniques, and continually refining it all. The opportunities are there for us to take advantage of. We will only find success when our preparation intersects with our opportunities.

Your Trading Plan Means Success

A well thought out and detailed Stock Trading Plan is the solid foundation for building your wealth, keeping your wealth, and successfully growing it. You must be dedicated to your plan. Following your plan part-time will give you part-time success. Don’t second guess your plan, but make changes as necessary. A trading plan is one key that can unlock your trading potential and help you make more money while losing less money. Every Trading Winner must have a Stock Trading Plan.

How I Started Trading – Part 2

How I Started Trading – Part 2

How I Started Trading – Part 1 covers my introduction to the stock market and business world, mostly through high school and university classes, and my personal interest.

I have always wanted to start and run my own businesses, which I feel greatly increased my attentiveness and receptiveness in my business oriented classes. I had a deep passion to learn everything I possibly could about the business world – economics, accounting, finance, entrepreneur studies, mathematics, statistics, marketing, sociology, banking, trading, investing, and every other related topic. Thankfully, I still possess this strong desire to continue learning, studying, and applying my knowledge to business, trading, and investing. I still have the drive to start my own successful businesses as well as be a successful stock trader and investor, just as I did when I was younger.

I know I can, and will, succeed in my ventures. Do you know you can, too?

To recap part one of how I started trading, I took as many classes, I read as many books, and I learned as much as I could about the stock market, investing, and business. These were the first major steps I undertook on the road to where I am today.

I never had a lot of money. I was not poor, but I was not rich. You could classify my family as “middle” middle class. I did not have a trust fund. I do not have inheritances. Everything I have, or my family has, we have worked very hard for. I suppose my drive and desire to learn, and turn my thoughts and ideas into actions, with results, was partly driven by necessity. The necessity to survive in the world (or rather, in the U.S.), which seems to promote a certain lifestyle or standard of living. I don’t want to be poor, living on the streets and begging for change. I don’t think anyone would choose to live like that. I also don’t want to be rich, having more than I could possibly ever need or use, such as Bill Gates. I saved most of the money I earned. I bought what I needed and every now and then I bought something I wanted. But importantly, I saved and I kept saving. I realized after I had enough money, I could have my money work for me. Not me working for money. I like this idea of money working for me.

I continued saving my money.

One of my friends opened a stock market trading account. He was very excited about the possibilities the stock market offered. He was making money while he was in class. He was making money while we were playing video games. His trades and investments were generating cash flow for him. We would talk about his stocks he owned and the stocks he was looking at. He would research many companies, finding the ones that fit his investing and trading style. I would then research his stocks as well. I became even more fascinated with the stock market, and more dedicated to opening my own online stock account. I wanted to make money while I was learning in university, just as he was.

I did some math regarding capital gains taxes and stock broker commissions. I quickly realized commissions fees would eat me alive. I would have to make a large percentage gain on my stocks just to cover commissions fees. However, I was not deterred from my ultimate goals. I felt $1000 was the minimum amount I could invest or trade which would not quickly disappear with commissions. I figured I could buy two stocks, putting $500 in each one. Saving $1000 was my immediate goal.

I continued saving my money.

Eventually I had saved $1000. I opened a stock trading account with Scottrade, which had $7 commissions on trades – the lowest commissions I could find at the time. I was very excited. I could finally start having my money work for me, through stock trades. I had already done my research and I had two stocks in mind: Walgreens (NYSE: WAG) and Sirius Satellite Radio (NASDAQ: SIRI). As soon as my money cleared and the cash was available for trading, I bought these two stocks. I wanted to hold on to each of these stocks for at least one year, since I knew the capital gains tax was substantially lower after you hold for one year. I remember purchasing shares of SIRI at 1.71 per share, shares of WAG at 29.98 per share. My first two trades. YES! I had completed one of my goals. I had opened an account with a stock broker. I had bought my first shares. I now had money in the stock market. I was now making money with my money. Rather, I hoped I would be making money with my money. 🙂

I continued saving my money.

My first two trades turned out to be fantastic picks. Looking back, I had bought WAG and SIRI at a great time. The market was at a very low point. Almost immediately after my purchases, the market picked up, and I was making good money on my picks. These profits unrealized until I sold, of course, and just profits on paper. But I was still making money. Eventually, I sold my shares to lock in profits. I sold Walgreens for a return of about 16%. Sirius Satellite Radio was even more profitable for me. I sold SIRI for a return of 100%. I had doubled the $500 invested in SIRI. Selling my first shares was very exciting for me. My hard work had paid off – handsomely. I had reached another personal goal. I successfully used my money to make more money.

How I Started Trading – Part 3 coming soon.

How I Started Trading

How I Started Trading – Part 1

How I got started in Stock Trading.

My adventures in stock trading all started one day when the Trading Bug bit me. Just kidding.

Since I was a kid, I have always wanted to start and run my own business. I wanted to become a successful entrepreneur. I consider myself creative and inventive, which is likely a result of my obsessive love of Lego’s growing up. I have always had a passion for creating ideas in my head, then building them up myself, whether it be playing with Lego’s or building my knowledge with my Trading Winner blog.

My desire to become a profitable investor started in high school. In my junior year I was given a choice of classes I would like to take. I chose economics. I didn’t know much about economics, finance, or business going in to the class, but thanks to a great econ teacher, Mrs. Pride, I quickly learned the basic elements, ideas, and strategies used in business. I knew I should pay close attention and keep a keep a mental notebook of all the things I learned in economics class. I was motivated not only by my own desire, but also by the powerful, yet relaxed, style Mrs. Pride used to convey her own knowledge.

Mrs. Pride would always have a weekly or monthly project for our class. One project was to build and manage a virtual stock market portfolio. The winning team was given a price, a pizza party. I love pizza so I wanted to be the winner. Unfortunately, my team and I did not win. But, I gained valuable experience and the potential success one could gain in the stock market sparked my interest.

Another project she gave us involved stock market research, or Due Diligence. Mrs. Pride assigned us a publicly traded company and our goal was to produce a written and oral report about everything we could research about our company. My company was Apple Computer (NASDAQ: AAPL). She had us write and mail a letter our company’s public relations office and ask them to send us a copy of the annual report. We also had to find out everything else we possibly could. We had to analyze the report, do our research, and then present our company to our class. This project helped me to learn the fundamentals of researching stocks and companies. At the end of the class, I knew the basics ideas used in analysis, research, and investing. Most importantly, my interest in the stock market had sparked and ignited.

In college, I continued my pursuit of business and financial knowledge. I had a long and deep love for computers, in addition to my interest in business and finances. Half of my classes were dedicated business (which I use as an umbrella term for finance, economics, accounting, investing, entrepreneurial studies, etc.), and the other half of my classes I used to develop a stronger foundation in computer science.

I took many business oriented classes in college, in order to learn as much as I possibly could. One saying I love is “knowledge is power”, which I strongly believe to be true. The classes I took, and tried to master, were: economics, finance, accounting, marketing, sociology, psychology, mathematics, statistics, and general business studies. I have taken numerous classes on each subject, learning as much as I could in order to master the topic. I wouldn’t call myself an expert in any of those fields, but I probably know more than the average person.

In addition to classes I have taken, I have also read numerous books, articles, and magazines relating to business, investing, trading, or general finance. There are too many great books to mention, but I’ll name a few of my favorites: The Intelligent Investor by Benjamin Graham, which covers investment principles and value investing; The Art of War by Sun Tzu, which has helped me plan, strategize, and execute my ideas; and Rich Dad, Poor Dad by Robert Kiyosake, which I strongly recommend everyone read and learn. These books, among many others, have inspired me not only to learn, but to develop and apply myself to becoming successful and reach my personal goals.

How I Started Trading – Part 2 coming soon.