• It is a “trailing” order. Over time, as the price of your stock moves up, you reset the trigger price a little higher—say once per week. That way, the stop price trails along behind the stock’s actual price, protecting you on the downside while not limiting your upside.

• It is a “standing” order. That means it just sits there until (1) it is executed, (2) it expires, (3) you change it, or (4) you remove it.

Of course if the stock’s price is going down, you leave the existing

It sounds simple at first: “Sell your losers and let your winners run.” Sure, obviously. But how do you know which stocks are your future long-term winners and losers? More to the point, how do you tell the difference—right now—between a stock that is only on a short-term losing streak as opposed to one which is destined to be a long term loser?

Clearly, it’s easy to list your winners and losers as of right now. But that’s not what this particular decision is about. This is about future events—unknowable by definition. Even if your stock is falling in price, you don’t want prematurely to decide that you made a mistake buying it or that its prospects have reversed from bright to dim. It may not be a loser at all. It just may have hit a bad patch. Your original positive outlook on the company and its stock may be correct, and the optimum decision may be to give the stock more time to reach its profitable destination. A stock in a short-term stall can become a long-term winner.

On the other hand, we all know Rule #1 of investing: Don’t lose. So you can’t wait forever to make your decision when a stock’s price keeps falling.

Every Sensible Stock Investor wants to take a strategic—not whimsical—approach to making sell decisions. You want to contain losses and sidestep risks.

The trailing sell-stop order is a very effective tool for sticking to a strategic approach. Let’s make sure we understand what this order is. Then we’ll talk about how to use them.

A trailing sell-stop order—which is a standard type of order with all brokerages—has these characteristics:

• It is a “sell” order with a condition attached. You attach it. When the condition is satisfied, the order to sell is executed—whether you are at work, in the bathroom, on vacation, or wherever.

• The condition is the ''stop'' price. That is the price you pre-select to trigger the sell order. If the stock’s price falls to or through that point, the sell order is executed. You pre-select the trigger price when you are thinking objectively and strategically, not in the heat of a fast-moving stock price.

• It is a “trailing” order. Over time, as the price of your stock moves up, you reset the trigger price a little higher—say once per week. That way, the stop price trails along behind the stock’s actual price, protecting you on the downside while not limiting your upside.

• It is a “standing” order. That means it just sits there until (1) it is executed, (2) it expires, (3) you change it, or (4) you remove it.

Of course if the stock’s price is going down, you leave the existing

On the other hand, we all know Rule #1 of investing: Don’t lose. So you can’t wait forever to make your decision when a stock’s price keeps falling.

Every Sensible Stock Investor wants to take a strategic—not whimsical—approach to making sell decisions. You want to contain losses and sidestep risks.

The trailing sell-stop order is a very effective tool for sticking to a strategic approach. Let’s make sure we understand what this order is. Then we’ll talk about how to use them.

A trailing sell-stop order—which is a standard type of order with all brokerages—has these characteristics:

• It is a “sell” order with a condition attached. You attach it. When the condition is satisfied, the order to sell is executed—whether you are at work, in the bathroom, on vacation, or wherever.

• The condition is the ''stop'' price. That is the price you pre-select to trigger the sell order. If the stock’s price falls to or through that point, the sell order is executed. You pre-select the trigger price when you are thinking objectively and strategically, not in the heat of a fast-moving stock price.

• It is a “trailing” order. Over time, as the price of your stock moves up, you reset the trigger price a little higher—say once per week. That way, the stop price trails along behind the stock’s actual price, protecting you on the downside while not limiting your upside.

• It is a “standing” order. That means it just sits there until (1) it is executed, (2) it expires, (3) you change it, or (4) you remove it.

Of course if the stock’s price is going down, you leave the existing

On the other hand, we all know Rule #1 of investing: Don’t lose. So you can’t wait forever to make your decision when a stock’s price keeps falling.

Every Sensible Stock Investor wants to take a strategic—not whimsical—approach to making sell decisions. You want to contain losses and sidestep risks.

The trailing sell-stop order is a very effective tool for sticking to a strategic approach. Let’s make sure we understand what this order is. Then we’ll talk about how to use them.

A trailing sell-stop order—which is a standard type of order with all brokerages—has these characteristics:

• It is a “sell” order with a condition attached. You attach it. When the condition is satisfied, the order to sell is executed—whether you are at work, in the bathroom, on vacation, or wherever.

• The condition is the ''stop'' price. That is the price you pre-select to trigger the sell order. If the stock’s price falls to or through that point, the sell order is executed. You pre-select the trigger price when you are thinking objectively and strategically, not in the heat of a fast-moving stock price.

• It is a “trailing” order. Over time, as the price of your stock moves up, you reset the trigger price a little higher—say once per week. That way, the stop price trails along behind the stock’s actual price, protecting you on the downside while not limiting your upside.

• It is a “standing” order. That means it just sits there until (1) it is executed, (2) it expires, (3) you change it, or (4) you remove it.

Of course if the stock’s price is going down, you leave the existing

• It is a “sell” order with a condition attached. You attach it. When the condition is satisfied, the order to sell is executed—whether you are at work, in the bathroom, on vacation, or wherever.

• The condition is the ''stop'' price. That is the price you pre-select to trigger the sell order. If the stock’s price falls to or through that point, the sell order is executed. You pre-select the trigger price when you are thinking objectively and strategically, not in the heat of a fast-moving stock price.

• It is a “trailing” order. Over time, as the price of your stock moves up, you reset the trigger price a little higher—say once per week. That way, the stop price trails along behind the stock’s actual price, protecting you on the downside while not limiting your upside.

• It is a “standing” order. That means it just sits there until (1) it is executed, (2) it expires, (3) you change it, or (4) you remove it.

Of course if the stock’s price is going down, you leave the existing

• It is a “trailing” order. Over time, as the price of your stock moves up, you reset the trigger price a little higher—say once per week. That way, the stop price trails along behind the stock’s actual price, protecting you on the downside while not limiting your upside.

• It is a “standing” order. That means it just sits there until (1) it is executed, (2) it expires, (3) you change it, or (4) you remove it.

Of course if the stock’s price is going down, you leave the existing stop price alone. The whole idea is that it is there to protect you against losses. It does not take long to review and reset all the stop prices in a small portfolio—maybe a minute per stock online.

So trailing sell-stops are used to limit losses from your purchase price or to lock in the gains of your stocks as they advance. A trailing stop order gets you out if the stock suddenly starts to tumble. It works like a ratchet, letting your stock price move up but not down past the trigger price you have selected.

I follow one hard-and-fast rule: Sell a new purchase before losing 10 percent in it. So as soon as I purchase a stock, I enter a sell-stop order too, usually at 8 percent less than I paid for it.

After a stock gains 10 percent for you, your stop price will have reached what you paid for it, so you will never lose money on that stock. After that hurdle has been cleared, how do you set the stop price? The goal is to give the stock enough room for normal volatility, while at the same time being restrictive enough so as not to let profits escape if the stock starts to go backwards.

There are two main methods to set stop prices. First, you can set the stop price as a percentage below today’s price (but never below what you paid once the stop price has reached your purchase price). I use the percentage approach most of the time. My “default” percentage is 15 percent, although I may change that (up or down) in certain situations.

• I might use a looser stop (such as 20 or even 25 percent) for a “blue chip” company that I really expect to hold for a long time. This would typically be a company that has a fat dividend yield.

• I usually use 10 percent if the “stock” is an ETF (exchange-traded fund). This is because funds are typically less volatile than company stocks, so they don’t need as much wiggle room.

• And I might use a stop as low as 2 percent or 3 percent for a stock that I have decided to sell. The tight stop price lets me squeeze out any unexpected upside that the stock may have left in it, but it still gets me out with negligible damage if the stock falls at all.

The second way to se