I Made $2K on Nvidia With This Strategy

Written By Alexander Boulden

Posted March 6, 2024

“Our favorite holding period is forever.” — Warren Buffett

Dear Reader,

When I talk to novice traders and those who’ve been in the market for decades alike, they have one thing in common.

They typically only use one strategy: buy and hold.

Now, if you’re investing horizon is forever, like Warren Buffett famously says, read no further. There’s nothing wrong with that, and I’ve said before in these pages that the majority of your money should be held in low-cost index funds through an IRA or 401(k).

But if you’re like me and want to lock in gains on a daily basis with your extra cash, you’ve got to do something other than buy and hold.

That’s why I want to talk with you today about something I learned about years ago and that has helped me consistently lock in gains.

It’s called a trailing stop strategy. Some think it’s complicated or fancy, but it’s really not. And once you get the hang of it, I’m confident you’ll be locking in gains every single day, month, week, and year.

Who wouldn’t love that?

Now, using a trailing stop is a type of investment strategy that manages risk. It’s a technique to protect profits and limit potential stock losses. It involves setting a stop-loss order that automatically adjusts as the price of an asset moves in a favorable direction.

The purpose of a trailing stop is to lock in profits while allowing for potential further gains and to minimize losses if the market turns against you.

Sounds simple enough, right?

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Here’s how a trailing stop typically works:

  • Initial stop: When you buy a security, you can set an initial stop-loss level, which is a specific percentage or dollar amount below the current market price.
  • Adjustment with price movement: As the price of the asset increases, the trailing stop follows it, maintaining a set distance (percentage or dollar amount) below the highest price reached. If the price falls, the stop-loss level remains fixed until the asset’s price surpasses the previous highest point.
  • Locking in gains: If the price continues to rise, the trailing stop will automatically adjust upward, helping to protect profits. If the price starts to decline, the stop-loss order is triggered once it reaches the adjusted level, limiting potential losses.

Trailing stops are particularly useful in volatile markets, as they provide a flexible way to manage risk while allowing for the potential capture of additional gains during upward trends.

Let’s use the current Wall Street darling Nvidia as an example.

Let’s say you want to get in on the ride but are fearful that the stock is too volatile and overpriced. Well, you’re not alone, but some of us want in on that easy money.

Say you buy the stock at $850 and set a trailing stop at 5%. That means the initial stop-loss order would be at $807.50 ($850 minus 5%). If the stock rises to $860, the trailing stop would adjust to $817 ($860 minus 5%). If the stock then declined to $817, the trailing stop would be triggered and your brokerage would automatically sell the stock to limit the loss to 5%.

The same goes for a dollar amount stop. Say you own shares of a stock that you bought at $100 per share and you set a trailing stop of $10. If the stock price increases to $120, the trailing stop will be adjusted to $110 ($120 minus $10). If the stock price falls, the trailing stop will move with it, always maintaining a $10 buffer from the highest price.

The percentage you use in the trailing stop is up to you. I personally don’t have a high risk tolerance with my spare cash, so sometimes I’ll set a stop as low as 1%.

It’s really up to you to decide what parentage or dollar amount you want to use based on your risk tolerance, the market conditions, and your investment goals.

So, to recap, this strategy is called a trailing stop because as the price of the asset moves in a favorable direction, your stop price “trails” the current market price at a specified percentage.

There’s also a volatility-driven trailing stop. In this approach, the trailing stop is based on the volatility of the asset. Let’s say you own a cryptocurrency and you know it’s extremely volatile. If the asset experiences high volatility, the trailing stop widens to account for larger price swings. Conversely, during periods of low volatility, the trailing stop tightens to provide more protection in case of a sudden price drop.

Hopefully these examples illustrate how easily a trailing stop strategy can help investors lock in profits while allowing the initial position to ride the risk and benefit from upward price movements.

If you want to get fancy, you can try using limit orders within your trailing stop.

You probably know that a limit order is just a type of order to buy or sell a security at a specified price of your choosing or better. So, unlike a market order, which executes immediately at the current market price, a limit order lets you set a specific price at which you are willing to buy or sell the asset. This provides more control over the execution price. Remember, that this doesn’t guarantee that the buy or sell order will be filled, so you have to be careful.

Limit orders provide investors with more precision in executing trades and allow them to avoid unexpected price changes. However, there is a risk that the order may not be executed if the market does not reach the specified limit price.

In short, using trailing stops ensures that you don’t risk your hard-earned cash when trading.

Make sure you understand how to use this feature within whatever brokerage you’re using and give it a test run.

You won’t be disappointed.

Stay frosty,

Alexander Boulden
Editor, Wealth Daily

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After Alexander’s passion for economics and investing drew him to one of the largest financial publishers in the world, where he rubbed elbows with former Chicago Board Options Exchange floor traders, Wall Street hedge fund managers, and International Monetary Fund analysts, he decided to take up the pen and guide others through this new age of investing.

Alexander is the investment director of Insider Stakeout — a weekly investment advisory service dedicated to tracking the smartest money on the planet so that his readers can achieve life-altering, market-beating returns. He also serves at the managing editor for R.I.C.H. Report, a comprehensive service that uses the highest-quality investment research and strategies that guides its members in growing their wealth on top of preserving it.

Check out his editor’s page here.

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