Anyone who has ever flown in a commercial aircraft can probably recite the words of the flight attendants regarding exiting the aircraft in the event of an emergency. Passengers and airlines take these plans seriously because knowing how to exit an airplane that has gone down unexpectedly can prevent a tragedy from having worse consequences.
In the event of actual crisis that occurs when the market is open,such as the events of 9/11, making transactions can be inhibited by the general pandemonium that rules the day. The common ups and downs of the stock market can be a different type of tragedy in other cases. If an investor loses an entire life’s savings because of an inability to submit market orders at prices that could have stemmed the losses, his or her entire life can be affected. Regardless of the circumstances, having an exit strategy is crucial in protecting a portfolio’s value.
One relatively simple way to plan an exit strategy from catastrophe and failing stocks is to use trailing stop loss orders. These orders are set up beforehand by the investor and set at a certain sell limit. If the stock price sinks below the limit, a market order to sell the stocks is generated automatically. The shareholder does not have to do anything else to put the order into effect. The losses remain at the stop loss level determined by the investor. The only way the order is triggered is if the price of the stock goes below the limit.
A trailing stop loss as an exit also helps protect any profits the shareholder may gain from a rise in the stock price. As the price rises, the stop loss limit trails it and also rises. Limited losses and protected profits through a trailing stop loss order is a well thought out way to make sure a portfolio is not negatively impacted when the vehicle must be exited.