Sunday, October 19, 2014

Protect your profits with a trailing stop loss?

After failing to achieve supernormal returns on the sale of Action Asia, Biosensors and FJ Benjamin, I decided to create a simple trailing stop loss Excel worksheet. What I discovered surprised me or may mean I just need to improve my Excel skills. A trailing stop loss combines for lack of a better word, three "things" we know about the stock investments. 

Firstly, we have to cut loss mechanically because our emotions makes it difficult. Secondly, while we should let our winners run, we do not know how long before they start losing steam and start declining in price. Lastly, we can only identify a peak (or bottom) in stock prices or indices only after the fact.

Using weekly historical prices, I setup my Excel as follows. 

1. Columns A to G will be hard coded so that you can just copy and paste prices from Yahoo! Finance. You can just extend the formulas in the cells when new prices are added.
2. Cell H2 that will find the highest price the stock achieved the past 16 weeks (3 months). This is using the Max formula.
3. Cell I2 will show a "sell" if the current day closing share price is below by threshold you set, in this case, 0.8 or a 20% loss. This is using the if formula.
4. Cell J2 will show you your gain if you were to sell it the next day the indicator pointed to sell. 

It is always good to start the problems before find the solutions. The problems were:

1. Multiple sell indicators with big profitability variations. In the case of Biosensors, if I were to exit at the first "sell" indicator on 6 June 2009, I would make a gain of 21%. Not bad, but this is lesser than the 170% when I sell on 14 February 2011.

2. Multiple sell indicators when penny stocks are sold off. I used the same worksheet on FJ Benjamin and because the stock came off highs before 2009, the sell indicators were continually showing.

The solution to the two problems would be to use judgement and to ignore the first sell signal and use the second sell signal. But this will create the problem of using discretion, which we were trying to avoid.

I have no solution to the second problem because large changes have been and will be a problem with penny stocks. The signals will probably flare up given the recent stock meltdown regardless large or small cap. I am very open to solutions either via comments below or email ( sgxstockpicker at the domain 

I have also read an article on investing using simple indicators, based on previous market peaks. This is more a portfolio approach than for individual stocks but also works on similar principles. My only comment is that as you gain more and more capital, buying into massive selloffs will be very painful to do, a problem that he acknowledges, hence a mechanical approach.

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