This One Strategy Could Guide Your Way

They were the best Games ever…

For 16 days in September 2000, our Olympics were the talk of the world.

From Cathy on the track to Thorpy in the pool, the highlights were many.

Chances are you remember this time like I do. It was a period of celebration and national pride like no other. The greatest show on Earth was in our backyard.

In fact, an Australian National University survey lists the 2000 Games as the nation’s fifth most significant event in living memory — beating both the internet’s arrival and the global financial crisis.

My most vivid memory is of the Opening Ceremony. You see, my wife and I were actually in the stadium — about halfway up, directly opposite the cauldron.

I still remember getting to our seats and seeing a little yellow suitcase — just like the brown case I took to school in the 70s. Everyone got one. It was all part of the Opening’s quirkiness.

The bags were full of memorabilia — things like caps, pins, stickers and pens. We still have ours today. They’re fun to go through with the kids every time the Olympics roll around.

Another of my memories is of the ‘blue line’.

Now, unless you live in Sydney, the blue line is probably a mystery…

You see, it was the marker for the marathon course. It was about 10 centimetres wide, and wove its way around the city streets. The Olympic runners followed the line from start to finish.

For over a decade, the blue line was a fixture on Sydney’s roadways. It’s mostly gone now. But you can still find traces of it all these years later.

So how does this relate to trading?

 

Following the red line

Well, Quant Trader has its own version of the blue line.

And like the marker for the marathon course, it guides those who follow it from start to finish.

Let me show you what I mean:

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This chart shows Quant Trader’s initial entry signal for Fisher & Paykel Healthcare Corporation Limited [ASX:FPH].

Do you see the red line below the share price?

That’s Quant Trader’s trailing exit stop. It plots the course of every trade.

A trailing stop is a simple concept to understand. It’s all about maximising upside by letting profits run, and then exiting stocks when the trend appears to be over.

You could think of it like this: All is good while a stock is above the red line. You only sell when the share price dips below it. The red line is your marker to follow.

Of all the exit strategies I know, the trailing stop is my favourite — by far.

And it’s one that you can readily use yourself…

There’s no need for special software, and you don’t have to be especially good at maths. You could manage a trailing stop strategy using a calculator and some basic price data.

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DIY trailing stops

The key is to decide how far to let your stop ‘trail’. Short-term traders typically set their stops closer to the share price, while strategies such as Quant Trader use a wider exit stop.

I’ll give you an example…

Let’s say you’re a medium-term trader — a typical winning trade could last for a year. This requires a trailing stop that gives your stocks plenty of room to move.

Now, suppose you place the following trade:

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You buy shares in Qantas Airways Limited [ASX:QAN] at $3.70 as the share price breaks upwards. You then set your trailing exit point 20% below the buy price, at $2.96.

Now, this is how you get your exit to ‘trail’…

You simply recalculate the exit point every time QAN hits a new high.

So when the shares reach $4.02, the stop will be 20% lower at $3.22. When the stock hits $5.88, the exit will be $4.70. And from the $6.53 peak, the trailing stop will rise to $5.22.

If the shares are trading sideways, or pull back, you do nothing. The trailing stop only rises when the shares reach a new high.

It’s as simple as that.

I’ve set a 20% trailing stop in this example. But you can use any figure you like.

For instance, some people like to set stops closer to the market price. While others prefer to give their trades more breathing space. The choice is yours.

Generally, I believe anything from 20–30% is suitable for medium-term trend trading.

Now, take another look at the chart for Fisher & Paykel:

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Quant Trader’s exit stop broadly rises with the share price.

But look closely.

You’ll notice the stop doesn’t move in lockstep like the QAN example.

That reason for this is simple: Quant Trader calculates trailing stops differently.

You saw the fixed percentage method earlier. This is both a popular and effective strategy. It’s also one of the simplest to calculate — you could do it yourself from home.

Quant Trader’s exit formula requires a bit more work. It includes a stock’s recent volatility as a key input. The aim is to tailor the trailing stop to each trade.

What difference does this make?

Well, that’s a topic for next week. It’s way too much to get into now.

But I will say this: Quant Trader’s trailing stops are unique to this service — you won’t find the same calculation anywhere else.

And next week, I’ll give you the inside scoop on how I calculate them.

 

Until next week,

Jason McIntosh,
Editor, Quant Trader

Editor’s Note: Trading can be a bit like driving through a maze of unfamiliar roads. You start out with a vison of where you want to go but, before long, you become hopelessly lost.

A trailing stop is a great way to give your trades direction. It marks the way from start to finish. If you like the idea of following a path, a trailing stop could be perfect for you.

And if you’d like a service to calculate your trailing stops for you, then Jason McIntosh’s Quant Trader could be for you. Check it out today. It could change the way you trade forever.


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


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