Here is a great question from a subscriber:

Until I thought about it for a while, I was not aware of the difference between your 20% Stop Loss practice and simply setting a 20% Trailing Stop Loss limit within my Broker's system. Then I realized that the biggest difference is that, while you investigate the last month -  in other words, 20 or so, closing prices - the latter follows all intraday up's and down's of a stock, thus being much more volatile (and executed more easily). I think it would be helpful for the community if you could go more into detail on this in a future newsletter.”

 

Never leave a stop loss order with a broker

As a general rule I never leave any stop loss orders with a broker.

As you know anything can happen in the markers and the daily price movements can sometimes be quite wild. Take a look at this flash crash explanation on Wikipedia – what is a flash crash.

 

This means if you leave a stop loss order with your broker there is a good chance that it may be executed even though the closing price may not be much different from the day before.

Because of these wild movements, and to keep trading costs low, I only look if the 20% trailing stop loss has been broken once a month – on the day the newsletter is published.

 

Only look at the stop loss level once a month

I only look once a month because on a monthly basis there may also be quite large movements that correct themselves again.