By John G. Robbins, president
WallStreet University, Inc.

        Trailing Stop-Losses! Technically, it's called a "good until cancelled sell order".
        Years ago, I discovered this technique when I was visiting a portfolio manager friend of mine. He was touting the 30+ percent gain he had made for his clients that year. I asked how he found so many stocks that went up so much. That's when he disclosed the secret of the Trailing Stop-Loss. He said that out of every 10 stocks he picks for his portfolio: 4 go up, 3 go down and 3 go sideways.
        He continued, "The difference between the average investor and me is that I use Trailing Stop-Losses to protect my gains and limit my losses.
        "Here's what I do to limit my losses", he said. "When I buy a stock, I place a Trailing Stop-Loss at 7% lower than the purchase price. That limits my loss to 7% on any stock that goes down from the purchase price. I've seen investors lose 50 to 80% before they sell. That means another of their stocks has to go up 80% just to get you even. As Jonah Keri of Investor's Business Daily pointed out, ‘Three 7% losses in a row can be made up by one 25% gain.' Rack up three 30% losses in a row and you'll need to triple your money just to get back to square one.
        "To protect my gains, I move the Trailing Stop-Loss up as the price moves up. Technically, I cancel the one sell order and place another sell order at 7% below the current higher price. For example: If I initially bought a stock at $100 per share, I would place the initial Trailing Stop-Loss at $93 to limit my losses. However, as the price moved up, I would move the Trailing Stop-Loss price up. For example: if the stock went to $125, I would cancel the sell order at $93 and place a new sell order at $116 to protect my gains.
        "Obviously, I'm not going to get out at the peak. But, I am going to get out at 7% below the peak. I'd rather leave some money on the table to protect the profits I've all ready made.
        "Do I always use 7%? No. Sometimes I use 5% for a blue chip with low price volatility. I'll go up to 15% for more volatile small-caps.
        "How often do I move it up? It just depends on how fast the stock is moving. Generally, for every 10% gain in stock price, I'll move the Trailing Stop-Loss up. So, if our $100 stock moved to $110, I'd move up Trailing Stop-Loss to $102 and lock in my $2 gain."
        The problem with Trailing Stop-Losses is that you have to keep on top of them yourself. Your broker doesn't want to do it without you telling him to because he doesn't make a commission until the stock is actually sold. So, he's working for no money since no brokerage firm has a computer system that can do it automatically for him.
        Never fall in love with a stock. There's no law that says you can't buy it back at a lower price.
        Just think how much you would have kept during the last bear market even if you'd had 20% Trailing Stop-Losses on those stocks!
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