In trading the stock exchange, nobody has a crystal ball. The cost of stocks can go down together with up. What’s required is an exit technique that will allow you to survive the bad stocks, and make the best profit on the good stocks. The strategy that I have found to work best is a trailing stop loss. For people that do not know what a stop loss is, I shall explain briefly. A stop loss is an order for your stock broker to sell your stock if the price dips to the level that you have stipulated.
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 good 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 a nd 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 idea 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 move the stop loss up again to slightly under the lowest part of the dip.
Using the stop loss as an exit strategy, only works if you stick to it, and not lower it, thinking that the price will go up again in a few days. In a few cases you will be right, but what usually happens is the price keeps moving against you, and you loose even more money. As a secondary to this, the money sti ll tied up in the first stock that is falling can’t be used on another trade.
Eventually , a note of warning about using the stop loss system to guard your capital. There are occasions when the markets goes thru a fast 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 will lack the ability to sell. Though these eventualities aren’t common, it’s better that you know about them. So they aren’t a shock when they do happen to you.
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