It’s no secret that “the market” is selling down, with a lot further to go before reaching something approximating ‘fair value’. In the face of such declines, it behooves one to think about ‘protection’, which can take many forms: actively shorting, or buying puts, or just trailing stops (which should already have been put in place). Not many investors trail stops, for several reasons, the least excusable one being they don’t know how to do it and the most common one being they believe that “prices always recover”. Well, sometimes they do. But the wait can be long and uncomfortable. Meanwhile, inflation has eroded the purchasing-power of the capital tied up in those positions.
By temperament, I’m an ‘investor’, not one of them oh-so-naughty ‘traders’ that investors love to disparage, and --as a bond investor, whose intended holding-periods often exceed 30 years-- I scoff at TMF’s pretense that they are “long-term” investors as they zip in and out markets in a mere 3-5 years. But I do indulge in some short-term, recreational trading, just because the game is fun. The other day, I was discussing with my daughter two trades that I had let get away from me. “Where was your stop?” she asked and scolded me up and down for not trailing one.
An aside: She’s the most ruthless trader you’d ever want to meet. She only buys at her price and only sells at her price and has gone as much as three months without a single losing trade. “Get in. Get out. Bank the profits. “Investing” is sheer stupidity in this over-priced, over-bought market.”
Anyhow, I had to confess that I had gotten in without identifying my exit. My bad. So today, as I was picking up shares of the gold and silver miners, I made the extra effort it takes to trail stops. Sometimes, the chart itself suggested to where prices might retrace, and I set my stop just below that. But most times, I just used Wm O’Neil’s rule of thumb of 8%.
So my questions to you are two:
(1) Do you trail stops? (Always? Sometimes? Never?)
(2) What process (or justification) do you use for trailing them or for not trailing them?
PS The market gods forgave me yesterday’s stupidities, and I got out of the two inverses I had put on at decent profits. But I will never, ever again not trail a stop. I learned my lesson.