Stock Trailing Stops Q&A   View Select Entries from Our Mailbag. Also See Our Q&A Page.

Q: When you advocate holding a stock for 8 weeks do you ever initiate a trailing stop during that time period? I have just finished reading Van Tharp and have decided to use Volatility Stops after my initial 10-12% stop has been set. I currently have a few positions that have risen around 10% in the last week and am wondering if it is time to change my initial stop with trailing volatility stops. The upside is that I will protect profits; the downside is that the stock may pull back, be stopped out and then take off again. If the latter happened, I assume I could get back in if it moves out of the pullback. Should I keep my initial stop for the full 8 weeks and then replace it with the volatility stop or make the change when the price rises to a certain level? Would you please give me your thoughts on this.

Thank you for your time.

A: Hi,

We do not place trailing stops during the first 8 weeks after purchase, mainly because we want to observe the stock's behavior during this period. Our 10-12% stop stays in place. After 8 weeks, we decide if this is a stock we should sell at our target of +25% to +30% or we should hold for a longer-term (6 months or more) play. In the former case, we try and sell on the way UP. In most cases, it is better to sell on the way up - you avoid the problems about giving back some gains ("I should have sold when it was this high"), and you avoid the frustration of hitting your trailing stops.In the latter case (longer-term play), the volatility stop loss that you mentioned may be a sound alternative, because it is hoped that you have above average returns on this position, since you are holding for much longer. We mainly use our GSA Stop-loss Line to get us out of longer term plays - the stop loss actually incorporates the stock's volatility and support resistance levels, so we are naturally biased towards this approach.

On your last question below, you could perhaps keep the initial stop-loss for the initial 8 weeks, unless the stock rises quickly by 20% to 25% before the 8 weeks is over, and switch to the volatility stop immediately. If the stock rises 10% to 15%, we don't think it makes sense to adjust the initial stop - there just isn't much to protect.

Hope this helps.

Best regards,

GSA