You already know that a stop-limit order provides downside risk protection. Yet, were you aware that you could employ the same “stop” directive to lock in a gain when one of your investments has dramatically increased?
A stop-gain order can be used to sell a holding that has far surpassed one’s expectations and/or when the current market price exceeds one’s evaluation of true value. Once again, let’s consider the SPDR Select Energy SPDR (XLE) at a price point of $60 in January. If one projects annual growth of 15%, XLE would hit $69 by year’s end. Yet a forward-thinking investor might decide to employ a “stop-gain” of $78 in the year, deciding ahead of time that a 30% gain would clearly be worthy of locking in the profit.
In this instance, the stop-gain instruction is ensuring a much more potent profit than a stop-loss provision alone. For example, it is entirely possible that XLE heads to $80, then hits a bearish patch that takes it all the way back down to $59 per share. And while a 10% stop-loss at $72 would ensure a tidy 20%, the stop-gain at $78 provides for a super-sized 30% return.
At Pacific Park, we use stop-gains sparingly. And again, “stop-gain” orders are not synonymous with “day trading.” They simply represent a tool in the shed for protecting against extreme downside as well as occasionally securing extraordinary upside rewards.
Granted, a stop-gain will not always work in your favor. Sometimes a winner… even one that’s bubbling over… can exceed your strongest convictions. Perhaps XLE rockets to $100 without a hitch, leaving you to ponder, “If only I hadn’t sold.”
That said, investing success always comes back to what you can control as an investor… and you can’t control price movement or direction. Again, you can control costs, yield and outcomes. Stop-limits and stop-gains ensure than you secure one of the favorable outcomes — a small loss, a small gain or a big gain. Best of all, stop-limits and stop-gains remove the panicky fear and the “if only” greed from rational decision-making.
Hedging is another technique for mitigating risk. Click here to discover more.