Learn to Lose
In life, you have to learn to walk before you can run. In the
stock market, you have to learn to lose before you can truly win.
Sure, your first trade may be a winner, but to consistently make
money in the stock market you have to learn how to lose. More to
the point, you have to learn how to cut your losses.
The majority of people who dabble in the stock market see
themselves as smart, educated and sharp. Self-belief is great.
The most successful people in the world have a strong belief in
themselves. Some of the most unsuccessful people in the world
also have a strong belief in themselves. So what's the
difference between the successful and the unsuccessful?
One major difference between successful traders and unsuccessful
traders is the ability to admit when one is wrong. A successful
trader will cut their losses before they get out of hand. An
unsuccessful trader will let their losses grow in the false
belief (hope) that things will pick up.
It would be nice if every stock pick was a winner, but when you
get the odd loser you better make sure you cut that baby lose
before you lose some big dollars.
The Stop-Loss
Before you even consider entering a trade, you should determine
your stop-loss point. Your stop-loss point should be set at a
price that you're willing to sell your stock at should things
turn bad. The price you pick will vary depending on your
financial position and the particular stock being considered.
You may want to set a stop-loss exactly 8% under your purchase
price, or you may want to set it just below some clear
resistance in a chart (if the stock falls below the resistance
level, you can be fairly sure things will continue South for a
while). The most important thing is to test your system. If you
set your stop-loss too close, you'll never be in the game when
the stock turns good. If you set your stop-loss too far away,
you'll end up losing too much money.
Remember, the main aim is to make a profit across your entire
portfolio. Imagine you owned $1000 worth of 5 different
stock. You set a stop loss at 10% current market value; so if
the value of a single stock drops to $900 you'll sell at that
price. Even if you are wrong with 3 of the 5 picks (a $300
loss), you only need to make 15% on the remaining 2 stocks to
break even. What if those remaining 2 stocks made 50% (which is
very realistic if you pick your entry right).. You'd actually
profit $700 across your entire portfolio despite the fact 60% of
what you picked were duds! 8)
Starting with 5 positions worth $1000 each: $5000 3 losing
stocks lose 10% each: -$300 2 winning stocks make 50% each:
+$1000 Total = $5700
Modern trading systems have completely automated stop-loss
systems. This makes it so easy to set stop-losses that you have
no excuses for losing big in a single trade anymore! In fact,
you're mad if you don't take advantage of stop-losses. The only
trick is setting them wisely. You'll learn how to plan and time
your entry and exit points on this site over the next few months.
Until then, good luck and keep on learning..