The Stock Market Report - How to Let the Good Times Run
The best way to maximize your profits is to be prepared to give
some back to the stock market. When most traders first hear
this, they are a little taken back. Why would you give any of
your profits back to the Stock market; because you are never
going to be able to exit right at the peak of the Stock market
trend. But, you can still stay with the trend as it develops,
and let your profits run in the Stock market. Then, when the
price turns, you can exit.
Traditionally, an inexperienced trader will exit a position
once they see a little bit of a profit in their trading account.
They want to crystallize that profit immediately. People don`t
like to lose, and they believe that those profits, made in the
Stock market, are their profits, and once they have them, they
don`t want to risk giving them back to the Stock market.
Is the Stock market strategy written about in this article
doomed to failure, since it breaks one of the cardinal rules of
trading; to let your profits run? It is always wise to implement
cardinal rules like this, but how do you implement this in the
Stock market? Well, after you`ve defined your trading float, set
your maximum loss, calculated your stop losses, and also
calculated your position sizing - you can determine how to
handle profits.
Once you`ve set your initial stop loss, you`ve ensured a
mechanism to cut your losses short. Now you need to introduce a
rule that allows your profits to run. By simply setting these
two rules, you can control two important variables - whether or
not you make a profit, and how much profit you`re going to make.
Of the two types of exits you use in the stock market, hopefully
it`s the ones we`re about to discuss now that you`ll get to
implement more often, as these are the ones that are implemented
once you`re in a profitable situation. Trailing stop losses will
allow you to follow a trend as it develops in the Stock market,
and exit the position at the point where you can realistically
maximize your profits.
A simple example can illustrate the importance of a trailing
stop loss. If you received a buy signal and purchased XYZ, and
set your initial stop loss, you`d be sure to keep your losses
small. But, your initial stop does not move. What happens if,
after purchasing XYZ, the asset runs up a few hundred percent?
Unless you have a way to lock in the profit, you could keep that
position until the share reverts all the way back down to your
stop loss, where you would exit the trade. You would end up
losing money even though there`s potential for some fantastic
gains.
Obviously, you need to have a way to keep a situation like this
from ever happening, and that`s exactly what a trailing stop
does. This form of stop is adjusted on a periodic basis
according to a mathematical formula that keeps it moving upward
as the price moves upward.
After the first day of trading, if the price moves in your
favour, or even if the shares volatility shrinks, then the
trailing stop is moved in your favour. If the Stock market then
moved against you enough for your stop to be triggered, you
would still take a loss, but it would not be as large as your
initial stop loss.
The key to the trailing stop loss in the stock market is that
you need to adjust the asset continually to make sure that the
stop is moved in your favour. A trailing stop loss is calculated
in a way that is very similar to the way we calculated our
initial stop loss. The only difference being rather than
calculating our trailing stop loss from the entry price, we`re
calculating our stop loss from the highest price since entry.
With a trailing stop loss in place, you will be able to let your
profits run, and let your trading system deliver the maximum
profit in the stock market.
David Jenyns, leading expert in designing profitable trading
systems, offers a huge free collection of trading related tips
and tricks. http://stocktrad
ingsystemsx.com/index.php