"Let the winners ride!" This is what almost every expert will
tell you to do... unless the market is too choppy. Then they say, "Make
gains, take gains."
I use a strategy that allows me to do both in my Macro Trader
portfolio.
It's called a trailing stop, and it's allowed me to lock in cumulative
gains of 36.12% on open positions in my portfolio. This is a key
distinction... I'm still holding these stocks, but I've captured double-digit
gains in the past eight months.
Here are real examples of my two favorite holdings.
On April 18, 2012, I told my Macro Trader readers about Watson
Pharmaceuticals, Inc. (WPI:NYSE). I said:
Watson is making waves because of a $6 billion takeover bid for
generic Swiss drugmaker Actavis.
This would be one of the biggest takeovers of the year, and banks are
falling all over themselves to get a piece of the action.
Bank of America is said to be the front-runner, but the play isn't in
the banks. It's in WPI itself.
You see, WPI is one of the top five biggest generic drug companies in
the world. Actavis isn't much smaller. So this deal would bring together two
of the biggest companies in the field, and give WPI unprecedented access to
Central and Eastern European markets.
WPI has since completed its acquisition, and is now the third largest generic drug company in
the world, and the new company is going to save hundreds of millions of
dollars in costs. Here's how the markets liked the news.
View larger chart
We snapped up WPI for $67.71, just days before the companies made a joint
announcement. That's the big pop you see in the chart above. After closing
that gap, WPI started to take off. Shares climbed more than $20 in four
months.
By the Aug. 1, we were sitting on a 16% gain, and the stock was rallying.
A big rally in a growing stock is the place to be. We wanted to take
gains, but be didn't want to get out of the position.
So we placed a 10% trailing stop on our holding, using the closing high of
$78.75. We would exit the play if WPI dropped below $70.87. That meant that
we had "locked in" gains of 5% above our entry price.
But here's the thing: WPI kept climbing.
The beauty of a trailing stop is that it keeps climbing too. The trailing
stop follows closing prices higher. That means when WPI prices climb, so do
our locked-in gains.
On Dec. 21, WPI closed at $90.85, an all-time high for the company. Our
10% trailing stop gives us an exit point of $81.76, a locked-in gain of
nearly 21% from our entry price!
And we're still in the play...
Here's another example of how to lock in gains during a rally.
On Sept. 12, I told my Macro Trader readers about a company
called Empresas ICA, S.A.B de C.V. (ICA:NYSE). ICA is a
heavy construction company with projects in Mexico and other Latin American
countries.
It builds things like bridges and airports, dams and highways, commercial
real estate, energy infrastructure, and plants and factories... I said:
Between 2013 and 2018, Mexico's investments in infrastructure are
expected to be 5.5% of GDP, much higher than the average 4.6% of GDP between
2007 and 2011.
In the first quarter of 2012, ICA had a backlog of $2.79 billion, and
over the past year, ICA's share price has climbed 40.49%.
Well, ICA has kept climbing. The black circle marks our entry point at
$7.45.
View larger chart
With a fast climber like ICA, a 10% trailing stop is the perfect way to
lock in gains and stay in the investment.
By Oct. 17, we were sitting on a 23% gain after a fast move higher. Our
10% trailing stop was placed on the closing high price of $9.13. That gave us
an exit point of $8.21, a gain of more than 10% above our entry price.
And like WPI, ICA has kept on climbing... moving our trailing stop ever
higher and locking in more and more gains.
Just yesterday, ICA closed at $10.45, giving us a locked in gain of more
than 26%!
But the best part is that ICA is up again today, and we're still in the
play to keep capturing those gains.
The trailing stop is a great tool to use in rallies. And it's especially
effective with fast-moving stocks.
Happy Investing,
Sara
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