[Editor's Note: Since completing his PhD in mathematical systems theory, Dr. Smith has applied his research skills in the private sector to a variety of problems. The common thread to all of Dr. Smith’s work is providing simple solutions to complex problems. As a consultant to one of the largest pharmaceutical companies in the world, Dr. Smith oversees the analysis of massive databases and is responsible for delivering user-friendly presentations that don’t require a PhD to understand. When the electric utilities in New York State were facing deregulation, Dr. Smith led the development of an expert system that helped one of the biggest firms in the region increase manpower by a factor of ten… without adding any additional personnel.He's the founder and President of TradeStops.com, which has just launched its latest, most effective version].

Don't we all need a "safety net" underneath our stock market portfolios? Only gamblers and inexperienced traders would answer "no". As an investor, there’s one simple step you can take to protect your investments that stands out above the rest. This simple step is often overlooked and undervalued, yet it's incredibly vital to the kind of results you experience.

 It’s more important than what stocks you buy, how you invest your money,or which way the market moves. Rather, it is a time-tested mathematical formula that, when applied to your portfolio, pinpoints exactly when you should exit or stay in a trade in order to maximize gains and minimize loss. Not only that, but there’s an automated program out there
that will apply this formula to all your stocks for you.

 

When trading, you need to have an exit strategy so that you’re confident exactly when you’re going to sell. However, many investors don’t really know exactly when to sell a falling stock, or how long to let a winning stock gain. From experience, I can tell you that it’s just as hard (if not harder) to let your winners run, as it is to cut your losers quickly.

 

Beginning to see a pattern? Reflect on your own experience as an investor – see anything
familiar? If this doesn’t at least somewhat mirror your own trading activity, then congratulations:
you’ve beaten the odds. But for most of us, it’s a struggle.

 

Not having a basic understanding of this human tendency will relegate you to the investing
under-class, consistently taking small gains and larger losses. However, understanding this
reality and putting a plan in motion to counteract this tendency will help control your losses
while increasing your returns.

 

It’s pretty difficult to change long-standing habits, though. That’s why a mathematical formula
is so valuable: it automatically signals when to sell, no matter how you feel about the
investment or company. It’s the same exit strategy, across the board. Pretty cool, huh?
It’s not just me, though. Studies have shown that it’s just human nature.

 

For example:• According to a Bloomberg study of 88,000 investors, “people are one and-a-half times more likely to sell a winning stock than a losing stock."

 

A study of 10,000 investors by the University of California’s Graduate School of Management similarly finds that the two most common mistakes investors make is that they “disproportionately hold onto their losing investments and sell their winners too early.”

 

• In Nov. 2006, universities from around the world jointly analyzed all trading activity on the Taiwan Stock Exchange (TSE) and found that investors are about “twice as likely to sell a stock if they are holding that stock for a gain rather than as loss.”

 

Beginning to see a pattern? Reflect on your own experience as an investor – see anything familiar? If this doesn’t at least somewhat mirror your own trading activity, then congratulations:you’ve beaten the odds. But for most of us, it’s a struggle.

 

Not having a basic understanding of this human tendency will relegate you to the investing under-class, consistently taking small gains and larger losses. However, understanding this reality and putting a plan in motion to counteract this tendency will help control your losses while increasing your returns.

 

It’s pretty difficult to change long-standing habits, though. That’s why a mathematical formula is so valuable: it automatically signals when to sell, no matter how you feel about the investment or company. It’s the same exit strategy, across the board. Pretty cool, huh?

 

The True Value of a Loss

 

When most investors think about losses, they think in terms of the immediate value of their
loss. Being down $500 or $1,000 in an investment obviously isn’t great, but it might not seem
like the end of the world. However, you should never think about money just in terms of its
face value, but also in terms of what it can do for you in the future.

 

For example, let’s say that I let a few investments get away from me early in my investing
career. I sold some winners too soon and held on to some bad investments a little too long –
nothing out of the ordinary, really. The total losses from my poor judgment only amounted to
$10,000. What’s the big deal?

 

Well, on average, the winners we sell outperform the losers we hold onto by 3.5%. If you’re
having trouble visualizing what that means, just visualize that $10,000 growing for 40 years at a compounded annual rate of 3.5%. You may be surprised to learn that your original $10,000 would have grown to be worth $40,000!

 

Analyzed another way, after only 10 years of growth at a 3.5% annual rate, that $10,000 could have been $14,000. After 20 years it would have doubled into $20,000. After 30 years, I would have had $27,119. And after 40 years that original $10,000 would have become nearly $40,000.

 

What I’m trying to say is this: the losses we incur today are compounded over time. It doesn’t
feel that way because we’re only losing “potential” earnings. But potential is still important,
and a major part of becoming a successful investor is learning to make decisions based on
facts rather than feelings.

 

 

 

 

 

Trailing Stops: A Simple Solution

 

I’m convinced that successful investing requires a method for controlling losses and expanding
gains, and if you’ve read this far, hopefully you are too. So what method do you use? How do
you choose?

 


Let’s say you buy a stock for $10. If you use a 20% trailing stop, you would sell that stock if it ever closed below $8 – 20% below $10. However, if the stock went up from $10 to $20, you would move your trailing stop up to $16 – 20% below the new closing price of $20.

 

If the stock closes below $16, you sell and make a 60% profit. Now it doesn’t matter if the stock falls to $10, or even $8, because you’ve already taken your profits.

 

But if the stock keeps moving up, so does your trailing stop. By using a trailing stop you won’t pull your profits out too early or hold onto a losing stock for too long. How many times have you seen a share price spike up and then reverse?

 

And how often do you miss these kinds of gains because you don’t have a method in place to tell you when to lock in your gains? In stocks, you must have a methodical strategy. If you follow the trailing stop rule, you have the best chance of outperforming the markets.

 

How it works:

 

As a mathematician with an interest in finance, I’ve spent years looking for solutions to
my investing problems – problems faced by thousands of others. Given my academic
background, I initially gravitated to complex solutions and formulas to answer the age-old
of question of when to sell.

 

However, I just kept returning to a simple mathematical formula. It’s simple, but it works.
The formula is called a trailing stop. It’s sophisticated enough to cut losses and maximize
gains, but simple enough to be understood by all investors.

 

Let’s say you buy a stock for $10. If you use a 20% trailing stop, you would sell that stock if it ever closed below $8 – 20% below $10. However, if the stock went up from $10 to $20, you would move your trailing stop up to $16 – 20% below the new closing price of $20. If the stock closes below $16, you sell and make a 60% profit.

 

Now it doesn’t matter if the stock falls to $10, or even $8, because you’ve already taken your profits.

 

But if the stock keeps moving up, so does your trailing stop. By using a trailing stop you won’t pull your profits out too early or hold onto a losing stock for too long.

 

How many times have you seen a share price spike up and then reverse? And how often do you miss these kinds of gains because you don’t have a method in place to tell you when to lock in your gains?

 

In stocks, you must have a methodical strategy. If you follow the trailing stop rule, you have the best chance of outperforming the markets. There are very few other strategies that are more reliable, and in today's volatile stock market, we need an objective, methodical strategy that we can rely on and that flies "under the radar" so that the market-makers and the exchanges can't outsmart us.

 

We've created a brief, 2 minute video and an informative "landing page" that will explain more of the features and benefits of our proprietary system.

 

You can learn more about trailing stop losses and the other features and capabilities that TradeStops delivers from viewing the testimonials of the trading pros who have tried and believe in our service.

 

Manually keeping track of your trailing stops isn’t easy. It requires you to check each of your holdings every day to see if a stop has been hit or a new high has been made. If a new high has been made, then you need to recalculate your stop. It’s time consuming.

 

Unless you’re the type that likes to stare at stock prices on your computer monitor all day long (more power to you if you are!), you need a service that will monitor your stops for you.

 

If you were to buy shares of XYZ stock at $10 a share and put a 25% trailing stop on the trade, TradeStops would let you know exactly (to the day) when the stock hit $7.50, thereby reducing your loss to only 25%. But if the stock were to move up to $20, TradeStops would automatically recalculate your trailing stop position to $15, locking in a 50% profit.

 

How exactly will you be informed when a trailing stop is hit? Once you set up your account,you’ll be asked to decide if you want TradeStops to notify you via email or text message. You can even have alerts sent to all your devices, or sent to your broker as well (if your broker agrees to receive your alerts). TradeStops can send alerts to up to 3 separate email addresses and 3 separate mobile numbers at your request.

 

Also, TradeStops will automatically adjust your alerts for dividends and stock splits. When a dividend or a split occurs on a specific trade in your portfolio, TradeStops will alert you with an email and adjust your trailing stop triggers accordingly. If for example, you were tracking a trailing stop on Microsoft at the time that it issued its $3 dividend, TradeStops would have subtracted the dividend from the highest closing price so that your stop would not have been negatively impacted.

 

And remember, with TradeStops your alerts don’t expire. No matter how long you hold a stock,whether it’s over several months or a few years, you’ll always know when your trailing stop is hit. By using TradeStops, you can quickly and easily track trailing stops on every stock you own,and reduce the risk that you’ll ever let your emotions control your investing decisions again.

 

How? TradeStops is an automated program, so no matter what happens to a stock,you’ll automatically know exactly when to sell a position. All you have to do is go to the TradeStops website, plug in a few details, and you’re ready to go. After that, you’ll know exactly when to pull out of a trade.

 

Are you ready to place a "safety net" under your investments and take more control of your investment results? I urge you to visit TradeStops which presents a free introductory look at how TradeStops can benefit you. If you're a more active trader, or if you have a larger portfolio of stocks or options to keep track of, consider our "TradeStops Complete" version, which I've outlined below:

 

Feature Tour

 

1. Tracks your price and performance targets so you don't have to

At TradeStops, we know that you have better things to do than spend your time worrying about your portfolio positions. That's why we've developed an automated system for tracking your stocks and alerting you when the time is right to make a change. Whether you need to know when to get in or out, TradeStops can help you track all of the following situations:

Price TriggersTime TriggersVolume and Moving
Average Triggers
Trailing Stops* Specific Date Volume Spikes
Percentage Gain/Loss # of Calendar Days 10, 50 and 200 day MAs
Dollar Gain/Dollar Loss # of Trading Days Close above/below MA
Fixed Price Triggers # of Profitable Opens/Closes MA Crossovers

* Trailing Stop triggers are featured in both our Trailing Stops Only service and in TradeStops Complete. All other triggers are only available in TradeStops Complete.

We want you to be empowered to reach your financial goals and improve your investment results as soon as possible. Give TradeStops and TradeStops Complete a "test drive" and experience for yourself why it's an effective and powerful way to eliminate unacceptable losses, let your winners run, and put in place an exit strategy that you can count on.

To read what Dr. Steve Sjuggerud wrote about us on Oct.31, 2012, and how you can attend our free, highly informative webinars, click here. You're on your way to the kind of investing that not only controls risk but offers unlimited rewards.

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