horns of a dilemma

Back on the horns of a dilemma

Hardly a month into my new strategy of using trailing stops to prevent losses and protect gains, I find myself once more on the horns of a familiar dilemma. In quite a few cases, the trailing stops have worked exactly as they should, bumping me out of a position after a stock soured. But in other cases, I've been stopped out just before a new upturn or, worse, leaving a lot of money on the table.

Way it's supposed to work


I bought BTU International (BTUI) after it pulled back from a new high, but just a few days before the company was due to report earnings. On the day the report was due, the stock fell sharply, triggering my stop-loss sale. The report, released after the bell, was not good news, and BTUI was slammed even more the next day. It has not recovered since, and if the stop-loss had not been in place, I would be out $2 per share, rather than 83¢ per share.

This is what the trailing stop is supposed to do: prevent really big losses from unexpected price declines.


W P Stewart (WPL) broke out of a consolidation just above $11.50, and I jumped in expecting it to continue going up. This was the right idea, except that company news a few days later sent the stock into a tailspin, and the trailing stop triggered a sale at $11.35 for a loss of $1 per share. Before recovering, WPL traded as low as $10.55, a price that would have been an unacceptably large loss for me if the stock had not recovered.

Although WPL has since recovered and traded over $14, I had bought in at a point when buying pressure (+DI) was falling; relative strength (RSI) was sagging; and the stock was already oversold (StochRSI). The signs of a possible reversal were there if I had only paid attention.


On the other hand, there have been several instances when I have been stopped out of a position just pennies before an upturn.


Geo Global Resources (GGR) moved up $2 from my purchase price in just three days. There was naturally a pause after such a prodigious move, and my trailing stop triggered a sale just 4¢ from the low that day. Two days later, it was up another $1.75, more than 15% from my buy price. It is still trading above $8, about $2.50 more than my buy price.


Harmonic Systems (HLIT) got as high as $7.75 before a brief pause followed by a gap down after three days. That was followed by two more down-days that eventually triggered a sale at $7.02, for a loss of 3%. This was on the day earnings were due after the bell, and the low of the day was just 6¢ below my sale price. The next day, HLIT took a big jump on a positive earnings report.


Champion Enterprises (CHB) moved up steadily after I bought, but then it took a rest that brought it back down to my buy price. However, the peak price had raised the trailing stop enough to trigger a sale for a few pennies more than I had paid. Since then, earnings have been released, jumping the price back up near the $10 level.

What do do?

It is frustrating to get stopped-out only to see the stock turn around and go higher. The problem is how to prevent big losses from the original purchase price and at the same time allow for big pull-backs after big price jumps.

Fibonacci Retracement levels based on Fibonacci numbers

I had been thinking in terms of tightening my stop as the price rose to preserve greater gains, but perhaps that is backward. Perhaps I need to loosen to allow for bigger retracements. Going back to our old friend Fibonacci, we are reminded that retracements of 38% or even 50% are not uncommon. That suggests that each time a stock hits a new peak and starts to pull back, the stop should be adjusted. I'm going to have to play around with this idea some more and try to work out some alternative methodologies.