How to Place a Stop-Loss Sell Order on a Mutual Fund
Stop-losses are the most sensible tool investors have to control losses. Stop-losses limit losses to small amounts of capital allowing the investor to re-enter a trade when conditions reassert themselves. Stop-losses should be instituted immediately after a trade is entered and reviewed and maintained regularly for as long as the trade is in place. Never trade without stop-losses.
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Instructions
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Know the type of mutual fund you own. Mutual funds may be open ended or closed ended. Open-ended mutual funds trade based on their weighted net asset value or closing price of each individual stock in the portfolio. Closed-end funds trade on major exchanges and may deviate from net asset value. Retrieve historical prices from various online sources such as Yahoo! Finance and Bloomberg.
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Trade in a mutual fund must be by technical analysis. Fundamental analysis is not possible for a mutual fund that is simply a variety of pooled stocks. Set up a trading plan for the protective stop-loss and the exit stop-loss. The trading plan should be based on a long term moving average not on short-term cycles in order to maximize returns. Typically, investors enter long-term trades for mutual funds at the 200-day moving average.
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Enter the prospective stop for up to 30 days at a time or as long as the broker will allow. Employ the protective stop-loss (the maximum loss the investor is willing to take after buying the mutual fund) so that under any condition no more than 10% of the portfolio is lost. Never let small losses become large losses by second-guessing your stops. Re-enter the trade when it passes the investment threshold again.
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Place exit stops for when the long-term trend has ended. Place the stop on a weekly basis based on moving averages or other criteria. Popular criteria is to use the lowest low of the past 20 days or a 15% drop in net asset value from its high (excluding dividend declaration in October).
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Add stops by telephoning your broker. They will send you a written confirmation of the stop. Online brokerages have stop loss prices that can be entered below the buy and sell columns on the trade page. Always enter stops and check to make certain they are in place. Adjust exit stops upward as the mutual fund price rises.
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Trade with stops for every investment or security you own. There is no possible reason not to limit your losses. Remember to raise your stops when stocks rise. Hold them when stocks decline.
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Tips & Warnings
Investigate different forms of stops such as the chandelier stop, the average true range stop and the moving average stop. Remember that there are different stops for entry risk and maintaining profits until the trend changes.
Resources
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