FIXED PERCENTAGE TRAILING STOP
Did your mom ever slap your hand, wave her finger in front of your face, and say, “Always use a stop!” Mine didn't either, but if she had, she might have been talking about a fixed percentage stop.
They work like the following: After buying a stock, place a stop 8, 10 percent, or any other percentage below the buy price. For example, if you receive a fill at $10, then a 10 percent stop would go at $8.93 ($9.00 stop, but placed a few pennies below the round number).
When price climbs, trail the stop upward. What does that mean? If the stock climbs to $30, a stop remaining at $8.93 is too far away to be of much use. Raise the stop as price makes a new high. If the stock rises to $11, place a 10 percent stop at 9.87 (a few pennies below the round number 9.90).
When setting the stop, what percentage should you use? That is the problem with this stop type. If the stock is volatile, normal price fluctuations will hit a stop placed too close, potentially cashing you out of a big winner. That could feel like giving away a lottery ticket as a birthday present and then finding out that it won. The solution to the percentage problem is to use a volatility stop.
- A fixed percentage trailing stop uses a constant percentage below the high water mark as a stop price.
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