Chart 1: KLCI chart since 1987 until recent, showing the three biggest uptrend.
An informed investor knows that every bull run starts after every bear run, as shown on chart 1. We mentioned some stock pick models in our previous articles and let's study the next important issue -how to take profit. During a bull run, stock picking is usually not the hardest for most stock are trending up, and therefore, chances in picking the uptrend stock is much higher, but the important skill is to maximize the potential of the uptrend and knowing how to take profit skillfully.
Other than profit taking, a proper cut-loss plan is also important, in which investors should have their trading plan laid out before buying any shares, this is because no matter how, there are still some risk in trading or investing.
There is a general miss-understanding in the world of trading, which is to always buy at the lowest, and sell at the highest, some even claim to buy even lower than the lowest. However, an experienced or skillful investor knows that most of the time, we can not buy the lowest nor sell at the highest, and there is no perfection is very trade. In fact, provided that the trading plan is right, it is totally fine to buy high and sell higher.
We had mentioned that buying lower or at new low is a highly risky approach, and the chances of making losses during a downtrend or new low is much higher, and many investors are stuck with their losses positions while holding their stocks during a downtrend, because they wanted to buy lower. On the other hand, investors are too afraid to lose money during an uptrend, and generally sell too early. These are typical for investors who has no proper trading plan.
There is a famous quote about trading plan, which is to 'plan your trade, trade your plan.' The idea is simple, investors have to plan their trade before buying, be prepared for all the possible things that might happen, and after buying, they should follow what they have planned, and do the right thing that they had planned is situation arise.
In trading plan, the most important fundamental is Trailing Stop. The idea of trailing stop is to limit the trading risk by following the direction of the trend. If the price is trending up, investors can apply an Exponential Moving Average to serve as the trailing stop method, and as price is moving higher, investors should lift their stop loss level higher accordingly.
If Trailing Stop method is applied correctly, this would help investors to minimize their trading risk to cut loss if price should reverse and break below the uptrend line. In addition, Trailing Stop method would also help investors to maximize the potential of their position during an uptrend, and avoid selling too soon before the uptrend is violated.
For example, we mentioned Maybulk [5077] in our past article, and the uptrend was suitable for conservative, high dividend investor, or fund managers. Let's study Maybulk [5077] again here to find out if we could apply Trailing Stop method in analyzing this counter.
Chart 2: Maybulk [5077], chart from 4th of November 2008 to 24th of March 2009, with 14, 21, 31 EMA as the uptrend trailing stop reference.
| Description: | |
| A | After some profit taking, price of Maybulk retreated but found its support at the 14, 21, 31 EMA, forming a Higher-Low, thus a buy signal. (RM 2.30) |
| B | Another round of profit taking, and price retreated again but remained supported by the 14, 21, 31 EMA dynamic support. Here, investor can lift their previous cut-loss level of RM 2.30 to RM2.50 level. |
| C | Price of Maybulk continued its uptrend after consolidated above the 14, 21, 31 EMA. Therefore, as price is still trending up, investors can slowly lift their cut-loss level from RM 2.50 to RM 2.70 level. |
| D | Price of Maybulk hit a resistance at RM 3.04 and corrected. However, again, it is supported by the 14, 21, 31 EMA, this shows that the 14, 21, 31 EMA is still the uptrend dynamic support for Maybulk. Therefore, investors can now move their cut-loss level from RM 2.70 to RM 2.90. |
As shown on chart 2, price of Maybullk is still trending up, and the original cut-loss level of RM 2.30 has been lifted to RM 2.90 level. If price should break below RM 2.90, it would be a signal for profit taking. In other words, investors who apply the Trailing Stop method correctly are lowering their trading risk while retaining a paper profit of RM 0.60. In short, this is the most effective trading plan.
With the use of Trailing Stop method, investors will not have to worry about not knowing when to take profit or cut-loss, and not to mention the common worry about selling at the highest of the uptrend. Simply put, as long as the price is still trending above the uptrend line, or the rising moving average line, investors should hold on to their positions until price should break below the uptrend line. When price breaks below the uptrend line, taking profit or cutting loss should be done without any hesitation for this is what investors had already planned for, this is an important skill which all successfully investors must have.
In conclusion:
After picking the right stock, the next question is when to take profit. If they had picked the wrong stock, the next question is when to cut-loss. Lastly, an important note is that when applying Trailing Stop method, the cut-loss level should only be lifted up and never shifted lower.
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