In trading the market, nobody has a crystal ball. The cost of stocks can go down in addition to up. What’s required is an exit plot that will permit you to survive the terrible stocks, and make an brilliant profit on the excellent stocks. The strategy that I’ve found to work well is a trailing stop loss. For people that don’t know what a stop loss is, I shall clarify quickly. A stop loss is an order for your stock broker to sell your stock if the price dips to the level that you have cited.
There are 2 ways of doing this. The simplest technique is to select how much you are ready to lose as a proportion of your investment. A excellent rule isn’t to go less than ten percent. Work out the cost of the stock at this level and set that as your stoploss. As the cost of the stock increases, keep moving the level of the stop up to keep the p.c. opening the same. Some brokers provide a trailing stop loss service, where you tell them what % to set the loss at and they do it for you.
The second technique is a touch more convoluted, and comes from Nicolas Darvas in his book How I made $2,000,000 in the market. The markets have a tendency to flow in stages. A stock rising will reach a top, and then dip back down. It may do this many times at every stage. The thought is to follow the chart of the stock and see where the dips are the lowest, and set the stop loss just under them. A second part which Nicolas propounds is that when the stock breaks out of the sideways trend, to buy more of the stock, and when the stock starts going sideways again to go the stop loss up again to slightly under the lowest part of the dip.
Using the stop loss as an exit technique, only works if you stick to it, and not lower it, thinking the price will go up again in 1 or 2 days. In one or two cases you’ll be right, but what often happens is the price keeps moving against you, and you loose far more money. As a secondary to this, the money still tied up in the 1st stock that’s falling cannot be used on another trade.
Eventually , a precautionary note about using the stop loss system to guard your capital. There are occasions when the markets goes through a quick fall in price, there are laws about how far a price can fall in one-day. If it falls this maximum distance, it can bypass your stop loss, and you could be unable to sell. Though these circumstances are rare, it’s miles better that you know about them. In order that they aren’t a shock when they do happen to you.
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