“How come you don’t use trailing stops?” asked one reader.
This was at our Total Wealth Symposium two weeks ago.
“They don’t work for my strategy,” I replied.
Understand that I’ve gotten asked this question several times now, and every time I tell people I don’t use trailing stops, they’re shocked.
You see, to me, trailing stops are outdated. They worked when markets were run by humans and bid-ask spreads were wider.
But today, computer programs and algorithms run the market. And bid-ask spreads are sometimes as little as one-tenth of a penny.
Beyond that, there’s virtually no trading in some stocks except at the open and close.
I’ll show you why these different things make trailing stops outdated, but first, let me explain what a trailing stop does…
Trading at the Speed of Light
A trailing stop is an order to sell a stock when it drops by a certain percentage.
For example, many people will put a trailing stop to sell a stock when it falls by 10%. That way, they’re out of a position before the losses get too big.
And in general, I agree that the best loss is a small one.
However, this technique worked best when markets were run by humans, the reason being that the markets ran slower.
By that, I mean prices moved up and down at a slower pace.
But today, trading takes place at the speed of light. And I mean that quite literally.
Trading at exchanges happens at an unbelievable pace. A firm trading stocks can execute more than 100,000 trades in a second for a single customer.
Back in 2015, trading between London and New York could take place in 2.6 milliseconds. That’s because of a $300 million transatlantic fiber-optic line between these two financial hubs.
The bottom line is that trading happens faster than ever. It’s only limited by the physical barrier of the speed of light.
Part of a Larger Puzzle
Trailing stops, in comparison, are like the Pony Express. They are an idea that assumes prices stand still for long periods.
