A quote from Don Worden, founder of Telechart 2000 and chartist extraordinaire.
"This one is so simple and obvious I'm almost ashamed to reveal it. It can and probably should used as a supplement to all other exit strategies and all combinations of exit strategies. After you are once 10 percent ahead, don't ever give back more than 66 percent of your profit. After you are once 20 percent ahead don't give back more than half your profit. After you are 50 percent ahead, don't give back more than a third of your profit."
1. Let's dissect Worden's suggestion for understanding. Consider the following table which lists three positions in a stock whose initial purchase price was $50.00 per share. Each of the three scenarios mentioned by Worden are included; ahead by 10%, 20% and 50%. The stop loss for each case is shown in the next to last column. These values would provide the profit protection prescribed.
2. I find it difficult to deal with the many conditions we might encounter. Such as, where do we set the stop if we are 15% ahead? Or 28%, etc., etc. To help simplify, I've included in the last column of the table what percent of the current price the stop represents. Interestingly, these percentages are not too different. In fact, if we set our profit-protection stop at 94% of the current price no matter how much our profit, the following results.
3. The comparison to the previous stops show the differences become greater the further our profit has increased. The danger here is in getting the stop too close to the current price. One way out of this dilemma is to use the 94% stop until we hit 20% profit, then revert to a flat 90% stop. The following results.
4. The differences are now manageable and this provides us with a simple guideline to follow:
a. If the prices increases putting us 10% ahead, set a profit-protection stop at 94% of current price.
b. When the price increases putting us 20% ahead, set the profit-protection stop at 90% of the current price.
From the net........
Regards,
Jayakrishnan.
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