Losses in trading are inevitable. Learn from this article so that you would know how you can manage them.
We are still in an economic recession. Indeed, we have felt the effect of the volatility of the market for the past few months. Arguably, many traders have immediately become investors, fearing to let go of the stock that was bleeding too much.
A few days ago, I was asked by a colleague how do I execute my stop loss and when to say that enough is enough. So I’ve written a blog out of it so that everyone will be guided accordingly.
1. It can minimize big losses.
In trading stocks, especially those that are very volatile, we need to be prepared for the risk that comes with it. However, even if risks on every investment assets are normal, it should be always a calculated risk.
One of the most enduring sayings is “Cut your losses short and let your winners run.”
Wise advice, but many investors and traders still appear to do the opposite, selling stocks after a small gain only to watch them head higher, or holding a stock with a small loss, only to see it worsen.
2. It protects the capital.
The mantra of trading is always to maximize the gain and protect the capital. That should always be very clear to us as a trader. It sounds easy but it will take years to develop. The greatest tragedy of a trader is when he sees his capital slowly drowning and shrinking.
Some have even got so depressed to the point that they have totally abandoned trading, sold their stocks, and have turned their backs on the stock market. We don’t want the same fate to happen to us, so we need to be always careful with our funds.
3. It manages the risk.
Cutting losses is selling the stocks that you have already admitted you are wrong. There will always be the wrong trade. The very fact that you’re able to acknowledge that, is a good sign that you’ve already grown as a mature trader. Acceptance is the first milestone to harness your skill.
4. It helps you sustain.
The moment when I practiced cutting losses and sets-up trailing stops, that’s the time I started to experience closer to consistent trades. Many times, I’ve proven that I have made the right decision. True enough, after selling them, it really did went down and took so long to recover. It always reminds me to always follow my trading plan.
So how do I set-up a stop loss?
1. 5-8% from your buying price.
5-8% for Blue-chip and growth stocks and 2-3% for basura stocks. Trading is not gambling, it is a number’s game. Setting your stop loss and executing it when it says so, is definitely going to save your stock from the bigger loss that is going to happen.
2. 5% below the support area.
When your stock has broken a significant support level, you need to treat it as a warning sign! However, some stocks would experience a bounce once buyers start to buy the stock. So giving an allowance of 5% will justify the bounce that is likely to happen but lower than that, I will already consider it as a break-down.
3. When the price is going below MA 100 and 200.
When a stock has broken-down major Moving Averages, that means that the stock is entering the bearish territory. Thus making the stock weak and on a downtrend. Once it will continue to go down further, consider selling it, and execute your exit plan.
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