Stock Trading - Stops Can Be Used To Preserve Profits As Well As Protecting Against Losses

By Nigel R Thomas

A stop loss is not just to protect you against losing bigger amounts with your trading.

Of course you'd need to actually sell for that loss to be realized. The alternative is to hold on to the losing stock for however long it takes to recover to the price you bought in at. If you're lucky and it does, then you've effectively tied up your capital for that period of time. It could be considered 'dead money'

However the stop against loss is not the only use they have. They can not only protect your capital from losses, they also can be used to protect your profits from evaporating.

In order to do this you need to move your original stop loss up to follow the stock price as it moves up from your original buy in price. Don't get too close as stock prices move up and down as they trend upwards, and you don't want to get stopped out with minor gains when the stock still has a long way to go.

Conversely, you don't want to hang too far behind so that if you do get stopped out you lose too much of the profit you have made.

This 'trailing stop' when used correctly will lock in your profits as the stock price moves up and only get triggered when the stock eventually runs out of steam and begins a long and protracted downward slide. The locking in of profits will ensure your profits will be realized in at the top of the long and downward slide. So when should you start moving your stop up from a 'loss' to 'break-even' to something more positive like a 'gain' and lock in profits? The answer is roughly between ten days and two weeks, or after the stock has continued upwards creating a number of resistance levels and significant support levels going up. It's the significant support levels going up that we are interested in. The more significant the better.

As the price rises, move your stop up to just below the next significant support level going up. If you can use an automated order and give it plenty of leeway in case of support level testing, perhaps consider being even more generous than at other times by allowing a half point clearance, or more.

The 'gain stop' will effectively lock in at least some profit should the stock turn around and head back down again. Don't forget though, it would need enough downward momentum to break through that significant support level before triggering your stop gain. That's quite a lot of selling needed to do that.

Notwithstanding any bad news which may have surfaced, and as we know it was a good choice of company to start with, there's no reason to suppose it won't continue onwards and upwards. Provided the stock is true to its recent chart history it should continue to move upwards for the short term, making significant support levels going up as it does. You will find that a new significant support level will get created every ten days to two weeks, so to optimally manage your stock will be required you to re-set your gain stops every ten days to two weeks. The beauty is we know that no matter what happens now, we will walk away from this trade with more money than we put in.

Not many will do that, and if you are lucky enough to have chosen a stock which doesn't have any deep pull-backs on its way up and therefore doesn't breach any of your gain stops, then before long you could well be holding a small fortune.

It won't go on up forever like this, and at some point you will get stopped out. If you're luckier still (and this does happen quite often) the peak where you take your gains could be accompanied by a jump in price which you can also take advantage of.