Buy-and-hold is not only the riskiest possible strategy, it doesn't even qualify to be called a strategy. Buy-and-hold is actually the absence of any intelligent exit strategy and is mostly adopted by default. Buy-and-hold is only recommended by unknowing pundits who are out of touch with the modern marketplace and are willing to advise their followers that taking unlimited risk and being in the market 100% of the time is a good idea. Obviously, that mistaken advice has proved to be very costly.
Here are three suggestions on how to implement an effective trailing exit strategy:
- Identify the direction of the current trend. If the trend is up you will want to set the trailing exit a safe distance away from prices so that you do not exit while the stock is trending up. You want to let profits run. If the trend is down, set the exit closer to prices to cut losses and preserve capital.
- Keep an eye on volatility and adjust the exits farther away if volatility increases and then move them closer if volatility decreases. The exits need to be kept outside of normal up-and-down price action that changes with volatility. Volatility is presently at record levels so give the upward trending stocks plenty of room.
- Before you exit, make sure you have a plan to re-enter the stock if the uptrend resumes. The trailing exit provides a very valuable yet inexpensive form of loss insurance. The price of that insurance is that your exit may occasionally get you out at a point where the stock stops going down and turns up. Rather than miss the uptrend and blame the protective exit for the lost opportunity, simply buy the shares back. Worst case, you will have paid a small price for protection from a possibly catastrophic loss. Your exit did its job.
Better Than Buy-And-Hold
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