The Importance of a Stop Loss
When you understand the basic principles of technical analysis,
you already have got some knowledge that will help you to trade
well. Technical analysis is important, but what's even more
important is something we refer to as money management. In order
to trade well, you should have a set of rules that you're going
to follow consistently.
The most important thing that you're going to have to learn to
become a succesful trader, is taking a loss.
If you have the courage to take a loss, you will always have
money in your trading account. Simply because you are willing to
sell stocks with a small loss, you will be able to make a profit
with only 4 good trades out of 10.
Taking a loss is admitting that you were wrong. Traders that
keep ignoring the negative signals of the market and refuse to
take a loss, might loose a very large part of their trading
capital. If a stock is trending lower, a turn north will not
happen that easily. But most of the investors don't like to
admit that they've made a bad decision and continue to hold the
losing stock.
Trading in stocks is speculating and so it's impossible to be
right all the time! Before you step in the trading game, you
must understand what you are doing. Let's compare it with the
owner of a shop: buying new products is always a risk, you never
know if they are going to sell well. The shop owner will only
try new products if his business can afford it, even if he will
make several wrong decisions in a row.
Traders in stocks are just like shop owners. We are in the
business of trading. As trader must decide how much money he can
afford to loose.
Let's look at the raw figures:
- if you lose 10% on a trade, you must win 11% on the next trade
in order to have your capital back;
- if you lose 15%, you must win 18% on the next trade in order
to have your capital back;
- if you lose 25%, you must win 33% on the next trade in order
to have your capital back;
- if you lose 35%, you must win 55% on the next trade in order
to have your capital back;
- if you lose 50%, you must win 100% on the next trade in order
to have your capital back;
You can only start to make money if you understand the huge
risks that are connected with not taking a loss on time.