"Floating" Stop-Loss - A Day-Trader Strategy That Can Work When Applied to Poker Session Profits
What does stock trading have to do with poker anyway? Well of course the gambling nature of both comes right to mind, but more importantly, both the experienced short term stock trader and the skillful poker player continually have to deal with the ups and downs of positive and negative earnings cycles. Both are also interested in when to get out of certain investments or games at the most profitable time. One way to approach this is with a floating stop-loss. It's almost too simple to call a strategy but here's how it works.
Suppose our stock market trader buys a fairly volatile stock for $1000. He knows that the equity has a history of regular up and down price cycles and looks like it might be on the verge of a substantial upside run. However, it could also start right off going down in price. He doesn't want to get killed if the stock takes a major loss in price. On the other hand, if it should make a big upside run, then he would like to hold and sell at a price close to the peak of its run rather than sell too early and miss out on much of the upside gain.
Our trader decides that if his short term purchase doesn't appreciate as expected and should actually start out losing money, then he can live with a 15% loss but not any more than that. He would then set his stop-loss at -15% of $1000 or a minus $150 which would make his starting sell-out price $850.
Now instead of that, suppose the stock should start out increasing in value as predicted. The $150 stop-loss is carried forward in this case too. If the price should go up $50 making the equity worth $1050, then this would also raise his sell-out price by $50 making it $900. Likewise if the price should then increase to $1500, then the sell-out would be $1500 less $150 or $1350. In other words, in this case the stop-loss sell price is always $150 less than the highest price that the stock reaches.
Whatever you come up with is of course subject to change and adjustments as you see fit and will give you a useful money management tool to use when you want.