One reader had this question about the use of sell stops:
I already own some funds where the most recent high was about 30 days ago and the funds have come down about 2.5 to 4%. If I want to use the 7% trailing stop rule, do I simply take 7% of the high 30 days ago and set that as the stop?
And if I buy a fund now, do I still use the most recent high from 30 days ago or just from the price I just purchased the fund? Thank you for you newsletter and blog.
The base price from which you measure your sell stops is in fact the highest price this fund has reached since you bought it. In your first example, that would be the price from 30 days ago.
However, if you decide to purchase more of this fund now at a lower price, you start all over in terms of finding a new high price for this portion of your holdings. For example, if you buy this fund now at $10 and the price subsequently ends up moving something like 9.90, 10.05, 10.20, 10.40, 10.30, 10.15, etc., then 10.40 would be your new high price to be used as a base for figuring your 7% sell stop (until it is replaced by a new high, of course).
I have never come across this situation, since my preference is to add more positions on the way up, when momentum is in my favor, and not on the way down, when a trend reversal could be in the making. This keeps the same high price high price intact for old and new positions.
Comments 5
Ulli,
Thanks for your response to my question about trend tracking on Saturday. I understand no strategy works all the time and so you have adapted to more volatile reality of the market in the last few years. I have a related question.
By buying and selling more frequently, are we not following a shorter MA trend line without putting that in words? For example, what we end up doing is more or less selling with a 7% trailing stop on a 50 Day MA instead of 200 Day MA of our published trend line.
In general, we want our new invisible 'trading' trend line to follow the chart steepness of a particular security as closely as possible while we still have our long term 'zoning' trend line of 200 Day MA as our guide.
Ulli, is that on a daily or weekly basis?
I already own some funds where the most recent high was about 30 days ago and the funds have come down about 2.5 to 4%. If I want to use the 7% trailing stop rule, do I simply take 7% of the high 30 days ago and set that as the stop?
Anon,
Sell stop prices are always tracked on a daily basis.
Ulli…
Ulli,
Why not just follow the turning up or down of the TTI moving average line itself, which is much simpler than fussing with stops?
Thanks
Char,
This was just discussed at:
http://thewallstreetbully.blogspot.com/2009/11/two-types-of-whip-saw-signals.html
Ulli…