Page 1117 - How to Make Money in Stocks Trilogy

Simple Routines for Finding Winning Stocks 103

Check the Volume!
If your broker doesn’t let you use conditional orders that track both price
and volume, be sure to check the volume after your trade has been trig-
gered. You want to see a nice spike in the number of shares traded when a
stock breaks out. That confirms institutional investors are buying aggres-
sively. (More on that in Chapter 6, “Don’t Invest Blindly.”)

Stop-Loss Orders
Purpose: To automatically cut short any losses

We’ve already touched on the cardinal rule of selling: Always sell if a stock
drops 7% to 8% below what you paid for it. You can use stop-loss orders to
make sure you stick to that rule, and it’s very easy to do.
Let’s say you bought a stock at $100 a share. If you set a stop-loss order at
$93 (i.e., a 7% loss), then the stock will be automatically sold at the market
price if it slips to that target.
If you have a hard time selling—if you’re afraid you might “freeze” when
it’s time to get out—having a stop-loss order in place can put your mind
at ease.

Trailing Stop-Loss Orders

Purpose: To lock in the bulk of your profits if a stock starts to decline
Trailing stop-loss orders can be very useful but also a little tricky, since there
are several different versions. So call your brokerage service and have them
show you the right way to set them up.
Here’s just one way you can use a trailing stop-loss.
Let’s say you bought a stock at $100, and it’s now trading at $150.
Congrats—you’re sitting on a nice 50% gain!
The last thing you want to do is let those profits disappear, so you could
set up a trailing stop-loss order to make sure you automatically lock in a
good portion of your gains if the stock starts to head south.
Let’s say you set a trailing stop of 10%. (You can choose a percentage or
dollar amount.)
If the stock drops 10% below the current $150, the sell order would be
triggered, and you’d lock in the remaining profits. (Still a nice gain of 35%.)