John bought stock X, and it has gone up (yay!).
John suspects stock X is near a peak. His options are:
- Do nothing and see what happens (not interesting to this question)
- Sell and take the profit
- Set a trailing stop loss, say at 99% of the current market price
Option 2 has the downside that, if stock X goes down directly, John will lose 1% of the current market price, which may be a significant chunk of his profit. On the other hand, the probability that he loses more than 1% is 0, while there is a >0 probability that stock X increases more than 1% before it goes down, yielding John even more profit. Since he cannot know what happens next, it seems the balance of probabilities always points to using trailing stop loss.
I could not find any guides on when to just sell instead of setting TSL. Is there a method to choose what to do, or is it just straight gut feeling?