Stops have long been considered among the best tools in the investor’s toolbox. We use these to protect our investments from crashes. A “trailing stop” follows the high price from inception. If we buy XYZ stock for $10.00 and set a trailing stop of 25%, then the initial stop will be $7.50. Should the security drop below $7.50 without increasing above $10.00, our stop will be triggered and the position will be closed. However, if the security moves to, say, $16.00, our trailing stop will rise to $12.00 (25% below the high price), and if the security drops to $12.00, the position is closed.
Sometimes we will recommend placing a calendar stop. Rather than following the price, a calendar stop simply determines how long we will hold the position before closing it.