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Position Sizing and Trailing Stop Alerts Pays Off


As any subscriber and regular user of TradeStops knows, TradeStops eliminates much of the uncertainty and fear involved in investing. The fear factor is touted in the mainstream media from time to time.



There is an article titled, “What Investors Should Really Fear — and What They Shouldn’t”. It was marbled with all kinds of marketplace analogies (including Post-Traumatic Stress Disorder) designed to traumatize even the most intrepid investors.


The article began by reminding readers that “Investors have undergone their share of financial trauma over the past five years, and remain twitchy with flashbacks”. The first reaction can be, “Not if they have carefully placed trailing stop-loss alerts and are using the many benefits of TradeStops”.


Another ancillary discipline besides trailing stop-loss alerts that TradeStops can help us to remember is the importance of “Position Sizing”. This is one of the simple tools that is absolutely vital to investing success – but virtually ignored by most investors.


We’ve covered the basics on this topic in a recent blog post. But let us share with you a real life example of how it pays off in one of the most important ways—to keep us from the danger of losing more money than we can afford to lose.


Position sizing is a personal decision about how much (or what percentage) of your investment money you want to have exposed to any one stock. When is the time to make that decision? Before you buy even one share you should have an amount or percentage in mind that you’re willing to stick with.


You might love big cash-rich companies like Apple or Microsoft which pay decent dividends. But if you have too much exposure to them and they represented an unreasonably high percentage of your investment assets you may be setting yourself up for a painful experience if one or both corrected sharply.


Those who bought Apple shares at $705 weren’t expecting to experience some painful losses. Yet if they held the stock when it fell below $400-a-share they might have panicked and sold. If you bought Apple at $705 and used a 20% trailing stop-loss alert you’d have exited your position at around $564.


Let’s say you started with $100,000 to invest in stocks. If you had decided ahead of time that you didn’t want any single position to represent more than 5% of your stock portfolio you would have invested no more than $5,000 of your money in Apple shares at $705. After your 20% stop-loss alert was triggered you’d have sold for a loss of $1,000.


You preserved the other $4,000 to buy back shares of AAPL if it fell as low as $400. Originally you spent slightly less than $5,000 to buy 7 shares of Apple at $705. Now you’re able to buy 10 shares with the $4,000 you protected by using a 5% position sizing discipline, and also using a 20% trailing stop loss.


This illustrates how using both a trailing stop-loss and a position sizing discipline can limit your downside risk. It takes much of the fear out of investing and helps us preserve our capital to invest in a potentially more lucrative stock or sector.


One more consideration; with the added confidence derived from having a TradeStops subscription and using it diligently, some won’t let the emotions keep them from making some other stock investments that had a much happier ending.


Fear and greed can lead to unacceptable losses and overexposure to one kind of investment… or no exposure to a well-timed investment with plenty of upside potential.


Using your TradeStops subscription regularly, updating your account positions and your trailing stop-loss alerts will help you to be an investor that isn’t ruled by emotions but by logic, self-discipline and awareness.


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