First, let us review the previous two types of Trailing Stop method in brief:
Fixed Price Retreat Trailing Stop, is calculating a Maximum Loss from the latest highest closing price, and as long as the current price is still within the allocated maximum loss, investors shall continue to hold their shares. This method is suitable for low-volatile, strong fundamental, and conservative stocks.
Dynamic Trailing Stop, is using the Bollinger Middle Band or the 14, 21, 31 EMA to track the dynamic support, and as long as the price is still staying above the dynamic support, investors shall continue holding their shares. This is a highly dynamic method, and it is suitable for counters that are in trend.
Yesterday's Low Trailing Stop method, is using yesterday's low as the cut-loss point or profit taking point. It is suitable for counters which has high volatility behavior and usually short term rally. As long as the latest price is higher than yesterday's low, investors should keep their share while riding the short term rally.
Chart 1: Tanamas – 7382, chart from 4/8/2003 to 5/12/2003.
As shown on chart 1, usually rallies of those high volatile stocks are short term, and the rallies are irrational. There are usually not corrections or consolidation in these types of fall, and therefore, it is much harder to analysis with normal trend analysis. Once the correction takes place, it is usually the end of the rally. Therefore, one should have a calm trading plan to trade such counters.
Why Yesterday's Low:
Chart 2: Yesterdays' Low Trailing Stop Method.
Chart 2 is an illustration of a typical short term rally. Assume that Mr. A bought at the candlestick 1, and made some paper profit at the closing, and Mr. A is ready to take profit tomorrow, and what would be his likely asking price to take profit? Most likely at the closing price of yesterday or even higher, or else, his paper profit will be evaporated.
As Mr. A sold his stock to Mr. B, who bought at candlestick 2, and when Mr. B make some profit and ready to take profit on the next day, Mr. B would be asking at a higher price too. This chain effect shall follow through and form candlestick 3 and 4. Meanwhile, as price rise, the amount of greed also increases in the market. This is because no one is experiencing any painful losses yet.
As shown by candlestick 5, price started dropping, and breaking below the low of candlestick 4. This shows that those who bought at candlestick 4 are now making losses instead of profit. Fear begin to rise as investors are suffering from losses. Meanwhile, as investors are making losses, their memory of their breaking even price in grow, thus creating a resistance, or selling pressure. If price should continue falling, (candlestick 6), it means those bargain hunters who bought at candlestick 5 are also losing money, thus adding the emotional of fear into the market, and also increases the selling pressure as more traders wanting to break even.
In short, a strong short term rally shall not have price retreat and break below its yesterday's low. If price should break below its yesterday's low, it is a signal to cut-loss or take profit.
Chart 3: Salcon 8567, chart from 12/12/2005 to 24/1/2006.
As shown on chart 3, if one should bought a A, then the arrow B (its daily low) shall be the immediate cut loss point. When price started to move, the trailing stop level shall be lifted according to C, D, and E level. This way will gradually reduce short term trading risk while retaining some paper profit. As indicated by F, when price break below arrow E, it is a signal to take profit, or to cut loss.
This weeks Case Study:
Chart 4: CONNECT – 0102, chart from 1/9/2009 to 26/11/2009.
As shown on the chart above, price of CCHB rose consecutively for 4 days, and for investors holding this stock, a Yesterday's low Trailing Stop method has to be used to minimize risk. As indicated by A, the lowest price of 26/11/2009 is the current trailing stop level, and by right, during a rally, price should not break below this point. If price should continue its rally the next day, the trailing stop level shall be lifted to the latest lowest price of the next day. This is a method for short term high risk trading, not suitable for conservative investors or long term investors.
Financial Summary as at 30/9/2009：
| Leading PER | 75 times | Dividend Yield | 0% |
| Dividend | Dividend Yield | Net Profit Ratio | |
| 31/12/2008 | 0 sen | 0% | -10.26% |
| 31/12/2007 | 0 sen | 0% | -8.89% |
| 31/12/2006 | 0 sen | 0% | -4.91% |
| 31/12/2005 | 0 sen | 0% | -8.09% |
Table 1: CCHB Financial Summary
Conclusion:
Yesterday's low Trailing Stop method is suitable for short term, high volatile rally, this is usually associated with high risk stocks, thus not suitable for long term or conservative investors. Again, it is important to note that trailing stop method can only be lifted with price rally, but can never be adjusted lower when price falls.
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