Sunday, January 23, 2011

Mmmm... Bacon! (Saving your's that is!)

Now that you have a few stocks in your account and you're feverishly checking the prices every ten minutes thrilled by every up-tick and distraught, rage-filled, and full of contempt for me who got you into this mess on every down tick.

How can I reclaim my life and get away from hovering over the sell button?

Easy!  It's all about the "stop-loss" order.  The stop-loss order is an order to sell your shares if the value falls past the value that you set or a percentage value.  The general rule of thumb is to set this value 10% LESS than your original purchase price.

Why on earth do you want to lose 10% you ask?  

Well, I don't really.  But this will cover my posterior if things take a turn for the worse or the market has an insanity week where everything gets sucked down into an evil vortex of panic. (Which the market does more often than you might think)

The good news is that this saves most of your money if the stop is triggered.  And lets you cool off and wait for things to settle before you either buy back your position (hopefully for LESS than where you sold) or decide to move your money somewhere else.

If you decide you still have faith in "Toothless Joe's Manure Haulage inc." and want to buy back in, if the price is still lower then where you stopped out, you'll get your shares back and have some extra cash left over.  Even though your balance sheet shows less than it was before the market "wobble" you still have the same number of shares you had before AND some more cash in the account.  Since you have a good feeling about ol' Toothless Joe, you'll be back up (with some profit in the form of that extra cash) in no time at all.

Here's what happened to me:  I was trying to "ride the range" with my shares of Royal Bank last year at about this time.  I had made a few trades and was up about $1000 or so (in cash) in addition to still having 100 shares.  Then in the late spring of 2010 there was a market "correction" for the valuations of all the Canadian big banks.  I had been adjusting my stop-loss order to be 10% away from the market price rather than my original purchase price.  This technique lets you preserve your profits in addition to your hard earned original investment.  So when things slid down the stop sold my shares for $56 each.  The valuations continued to slide down to about $50 where I decided to buy back in.  Since I only paid $50 each, I had an extra $600 in my account to do something else with.  Royal has essentially been "going sideways" ever since and I've been holding ever since mid July 2010.  It did go up to about $56 again and then back down to about $50 and now it's up again to $53 ish.    So this time around my stop was NOT triggered.  

How do you place an order to stop?

Enter an order to "SELL" with a "STOP" condition and set your price or percentage.  Make sure to set the time-frame to 30 days rather than "day-order" or you'll have to re-enter your order every day!

If your brokerage permits you can set a "trailing-stop" order which will automatically adjust the value for you! Just enter your percentage and let it do it's thing.

Don't forget to come back in 30 days though and update it.  Current rules don't let orders stay open for longer than 1 month.

The only pitfall however is related to how tight you set your stop.  You don't want it to trigger unnecessarily since your sell and then subsequent re-purchase will cost you 2 commissions.  If you're going backwards because of that then you're setting things too tight and losing money at the same time.  Plus certain things are skittish sometimes.  Your stop might trigger just before a press-release and then it shoots up.  Sorry mate... you just lost out.  So 10% is a good ball-park figure.  Some of my stuff has a looser leash.  It all depends on the nature of your trade.  (And some things I have no stop set at all...  I want to ride it out and I know it's a long-term winner)

There...  I've successfully re-claimed your sanity and preserved your hard earned cash.  Now go play outside already!  You're getting fat, bald, and middle-age looking basking in the glow of your computer monitor!

Next time: I didn't quite get to Hold n' Hope or Cut n' Run this time... So I'll do that next post!

Disclaimer: by having read ANY of my blog contents you have agreed to not sue me for any of my advice or recomendations.  I have both successes and failures trading.  (Thankfully more success!)  My advise is just my opinion.  It might not be right for you, but I'll try to explain why it's right for me.  So you're free to use this advice as you see fit. I am not liable nor am I accountable if you lose your shirt/house/dog/girlfriend/wife/pet rock/or favourite bottle-cap collection.  Take some damn responsibility for your own damn actions!  YOU did it... If you're trying to place blame, look in the mirror!

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