Other than profit taking, the cut-loss plan is also as important, and therefore, investors should always have a proper trading plan, which includes, buying, profit taking as well as cutting loss, and the right method is to apply trailing stop, which is a method best used by professional, and suitable for position trading.
Basically, there are 3 types of Trailing Stops: (1) Fixed Price Retreat Trailing Stop. (2) Dynamic Trailing Stop, and (3) Yesterday's Low Trailing Stop.
This week, let us discuss on Fixed Price Retreat Trailing Stop.
The idea of Fixed Price Retreat Trailing Stop is very simple, which is the calculate a maximum retreat from the latest closing price, and use that price as a profit-taking or cut-loss point. When price is rising, re-adjust the Trailing Stop level, by lifting the level according to the latest closing price. This is to ensure to maintain a positive position, as well as to retain paper profit, while lowering trading risk gradually.
| Day | Closing Price | Next day Cut-loss point (8% below closing price) | Action |
| 1 | RM1.00 | RM0.92 | Hold |
| 2 | RM1.05 | RM0.966 | Lift Cut-loss point, hold. |
| 3 | RM1.15 | RM1.06 | Lift Cut-loss point, hold. |
| 4 | RM1.20 | RM1.10 | Lift Cut-loss point, hold. |
| 5 | RM1.50 | RM1.38 | Lift Cut-loss point, hold. |
| 6 | RM1.80 | RM1.66 | Lift Cut-loss point, hold. |
| 7 | RM1.78 | RM1.66 | Keep the same Cut-loss point *, hold. |
| 8 | RM1.70 | RM1.66 | Keep the same Cut-loss point *, hold. |
| 9 | RM1.68 | RM1.66 | Keep the same Cut-loss point *, hold. |
| 10 | RM1.67 | RM1.66 | Keep the same Cut-loss point *, hold. |
| 11 | RM1.65 | RM1.66 | Take profit. |
Table 1: Fixed Price retreat Trailing Stop table.
*Trailing stop level can only be lifted up, not shift down.
As shown on table 1, the Fixed Price Retreat Trailing Stop method is very rational, but less flexible. Therefore, this type of trailing stop is only suitable for low volatile stocks, which has strong fundamental. Meanwhile, it is important to remember that to adjust the trailing higher as price is moving higher, but one can never adjust the trailing lower when price is falling. In short, as long as the correction from the latest closing price is less than the maximum loss, say 8%, investor should hold on to their positions, to maximize the potential of the long term uptrend.
Chart 1: GAB – 3255, weekly chart from December 2008 to 6/11/2009.
As shown on chart 1, since December, 2008, price of GAB has been moving in uptrend. Despite many corrections and consolidation, price has never treated more than 8% from its closing price. Therefore, with the Fixed Price Retreat Trailing Stop method, investors who had bought the share earlier shall be able to hold on to their positions until now. This way, investors will not have to worry about not able to sell their share at the highest price, but rather to maximize the potential of the current uptrend.
Financial Summary as at 30/6/2009：
| 4 Quarters Rolling PE | 15.87 times | Dividend Yield | 5.50% |
| Dividend | Dividend Yield | Net Profit Ratio | |
| 31/06/2009 | 41仙 | 6.27% | 11.05% |
| 31/06/2008 | 44仙 | 8.46% | 10.54% |
| 31/06/2007 | 45仙 | 7.63% | 10.50% |
| 31/06/2006 | 42仙 | 7.71% | 13.13% |
| 31/06/2005 | 41仙 | 7.26% | 11.34% |
Table 2: Financial Summary of GAB
Chart 2: HAIO – 7668, weekly chart from 5/12/2008 to 12/11/2009.
As shown on chart 2, price of Haio stated its uptrend in the end of 2008, and around March of 2009, the uptrend of Haio accelerated. During this uptrend, there were many corrections and consolidation too, but the corrections were the best type of correction, which was a sideways low volatility movement. Therefore, provided that investors are following the Fixed Price Retreat Trailing Stop method, there is no need to worry during the consolidations, as long as price does not retreat more than 8% from its recent highest closing price. This way, investors will not sell their position too early during a consolidation and missing the strongest rally in September, 2009.
Financial Summary as at 31/7/2009：
| 4 Quarters Rolling PE | 11.75 times | Dividend Yield | 5.28% |
| Dividend | Dividend Yield | Net Profit Ratio | |
| 31/04/2009 | 42 sen | 9.46% | 11.96% |
| 31/04/2008 | 40 sen | 10.42% | 12.97% |
| 31/04/2007 | 18 sen | 8.11% | 11.29% |
| 31/04/2006 | 8 sen | 6.35% | 7.06% |
| 31/04/2005 | 6 sen | 6.00% | 3.95% |
Table 3: Financial Summary of Haio.
Chart 3: Public Bank – 1295, chart from 11/3/2009 to 12/11/2009.
Public Bank is a reputable high dividend counter, but despite the strong fundamental and track record, price of Public Bank will also retreat and form a downtrend when the stock market in general is having a bear run. Therefore, the Fixed Price Retreat Trailing Stop method shall protect investor from holding shares during a bear run, while helping investors to remain in position during an uptrend.
Financial Summary as at 30/9/2009：
| 4 Quarters Rolling PE | 14.98 times | Dividend Yield | 5.02% |
| Dividend | Dividend Yield | Net Profit Ratio | |
| 31/12/2008 | 55 sen | 24.58% | 6.29% |
| 31/12/2007 | 75 sen | 22.22% | 6.82% |
| 31/12/2006 | 60 sen | 22.89% | 7.69% |
| 31/12/2005 | 55 sen | 24.50% | 8.66% |
| 31/12/2004 | 90 sen | 25.11% | 12.68% |
Table 4: Financial Summary of Public Bank.
Conclusion:
The hardest part of investing is not about buying, it is when to take profit or more importantly, when to cut-loss. It would be fruitless if one could find a best entry point but missing the right exit point. Or, if one should failed to cut loss, it will most likely result in losses that are too huge to recover, despite the low entry cost. The Fixed Price Retreat trailing stop method discussed here is suitable for low-fluctuated, strong fundamental counters. When using trailing stop, the cut-loss point or profit taking point can only be lifted with the rally of price, and it can never be shifting down. In short, if investors had prepared for their maximum loss, say 8%, the biggest risk after buying would be around 8%, and when the stock is moving up, and until the end of an uptrend, investors is not going to sell at the highest of the trend, but only around 8% below its highest closing price.
Copyright © 2009 Straits Index (M) Sdn BhdImportant Disclaimer:These content provided by Straits Index (M) Sdn Bhd is solely for education and information purposes only, and do not suggest any investment advices. All information displayed are believed to be accurate and reliable. Interpretation of the data or analysis is at the reader's own risk. Straits Index (M) Sdn Bhd reserves the rights but obligations to update, admen, or even terminate the materials. 重要声明:以上的内容由海峡指数(马)私人有限公司提供,纯粹是教育性质, 并不是任何的投资忠告。所有资料显示认为是准确和可靠的。对数据或分析的解释和用途是在于用户自己的风险。海峡指数(马)有限公司持有保留及义务更新,甚 至终止材料的权利。
