Over the past few weeks, we’ve seen just how volatile the financial market can be… Huge swings, like when the Dow dropped more than 672 points in 2 1/2 weeks, can throw a wrench in even the best-laid investment plans.
You’ve heard us time and time again tell you to prepare an exit strategy before you even jump into an investment.
But I’d like to share with you an investment strategy that helps you stay in a trade, while protecting your gains at the same time.
This strategy comes from Michael Robinson, editor of American Wealth Underground and 180 Trader.
Recently, Michael helped his American Wealth Underground readers lock in 250% gains with this specific strategy.
I asked him about his methods. He said:
I’m a long-term bull who is reluctant to sell shares of really great companies. The winners are hard to find in this field and thus difficult to dump. But we must protect ourselves against the market’s intense volatility. So, using stop-losses on half the stock means you get to book some gains and still take part when the rally occurs. All four rare earth giants listed here rallied back to about the trailing stop-loss level.
Now, this is what that looks like in a real example. I can’t give you the name of the company for obvious reasons, but this will explain how Michael can take such great gains and remain invested in a volatile market.
Michael recommended Company X a year ago, and boy, did it take off, climbing some 300%. That is a substantial gain that you don’t want to lose to a volatile market.
But it’s also got huge momentum, and the potential for even more gains, so any protection that takes you out of the trade also takes you out of that momentum.
So Michael told his AWU readers to set a stop-loss.
Ordinarily when we talk about setting a stop-loss, we talk about a price at which you sell your whole position when share prices start to slide against you.
But what Michael did was tell his readers to only sell 50% of their position if Company X hits the stop-loss.
That allows readers to take huge gains in a crazy market and still be positioned once Company X rebounds. That’s how readers locked in a gain of 250%, with the hope of more to come as Company X is already starting to move higher again.
This stop-loss strategy might be different from the one you use, but it sure is powerful.
Now let me enhance this investment strategy for you. Michael set a specific stop-loss exit price for Company X. That certainly locked in gains for his readers. But what if Company X climbed another 5% or 10% before dropping back to that stop-loss price?
His readers could have lost out on those gains.
Now, don’t get me wrong — that 250% readers saw from Company X is nothing to quibble over, particularly in this market.
But making one small change to this investment strategy can help you eke out a few more percentage points and give you the same protection.
I’m talking about using a trailing stop. Trailing stop-losses are slightly different from specific stop-losses. Specific stop-losses set an exit price. So let’s say Company X is trading for $10 a share, and you set a stop-loss at $8 a share. No matter what Company X does, your exit price is $8 — a loss of 20%. If Company X trades as high as $15 a share, you’re not protecting any of your gain by keeping a stop-loss at $8.
Of course, you can move that stop-loss up as you make gains. This is, in essence, what a trailing stop-loss is.
A trailing stop follows the price of the stock higher. So let’s take that same figure and use a 20% trailing stop. At your initial buy price of $10 for Company X, a 20% trailing stop will still give you an exit price of $8.
But if Company X climbs to $15 a share, your 20% trailing stop gives you an exit price of $12… That protects a 20% gain from your initial buy price.
Trailing stops have a lot of power when it comes to protecting your gains — more so than the traditional trailing stop. If you combine that with Michael’s super-smart investment strategy to take gains on only 50% of your position and you’ve got a highly adaptive tool for volatile markets.
Editor’s Note: Last Thursday, Michael wrote his readers and told them to buy shares of a tiny company poised for a big rebound. He said his Triple Cross system flashed a buy signal. By the next day, shares of the stock surged by double-digit proportions. He nailed it.
There is a reason our newest service is quickly becoming one of our most popular. Michael’s advice works. Follow the link to read his latest work.
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