How to Make Money Through Using A Stop Loss in Stock Investing
A stop loss is a price that we use as the trigger price to sell out of a losing trade. We need to have a stop loss price because not all trades succeed - some fail. Even the best trading techniques struggle to deliver a success rate of more than 70%. Therefore even using some of the best trading techniques we will still end up with two or three losing trades out of every ten. For these losing trades we must keep our losses really really small.
Every trade can only have one of five possible outcomes:
A small profit.
A small profit.
Breakeven.
A large loss.
A small loss.
That's it. Five possible outcomes, no more, no less. Every single trade will result in one of these five outcomes. Now if we could eliminate one of these five outcomes, which one would we choose? That's right - the large loss. If we eliminate the large loss we are only left with the other four possible outcomes. If our small losses, breakeven trades and small profits even out over a period of time we will only be left with the rather pleasing occasional large profit.
We use the Stop Loss to eliminate any large losses because it is clearly a very sensible thing to do.
We use a Stop Loss Rule. The stop loss rule has three parts to it:
1. You must have a Stop Loss in place for every single trade that you do.
2. The level at which you set your Stop Loss price is set at the level where your loss will be 2% of total trading capital.
3. When your Stop Loss price is hit then you must sell. No waiting one more day hoping that your trade turns into an "overnight success".
For those new to share trading, and maybe some not so new, the most difficult part of this rule is part 3, selling when your stop loss price is hit. It's the most difficult part of the rule because it brings into play your emotions. And of course our ego pops up and it just hates admitting that we were wrong about anything! Despite this huge emotional drag not to sell - sell we must. When your stop loss price is hit you sell. This simple and straight forward rule protects your hard earned cash. - 23221
Every trade can only have one of five possible outcomes:
A small profit.
A small profit.
Breakeven.
A large loss.
A small loss.
That's it. Five possible outcomes, no more, no less. Every single trade will result in one of these five outcomes. Now if we could eliminate one of these five outcomes, which one would we choose? That's right - the large loss. If we eliminate the large loss we are only left with the other four possible outcomes. If our small losses, breakeven trades and small profits even out over a period of time we will only be left with the rather pleasing occasional large profit.
We use the Stop Loss to eliminate any large losses because it is clearly a very sensible thing to do.
We use a Stop Loss Rule. The stop loss rule has three parts to it:
1. You must have a Stop Loss in place for every single trade that you do.
2. The level at which you set your Stop Loss price is set at the level where your loss will be 2% of total trading capital.
3. When your Stop Loss price is hit then you must sell. No waiting one more day hoping that your trade turns into an "overnight success".
For those new to share trading, and maybe some not so new, the most difficult part of this rule is part 3, selling when your stop loss price is hit. It's the most difficult part of the rule because it brings into play your emotions. And of course our ego pops up and it just hates admitting that we were wrong about anything! Despite this huge emotional drag not to sell - sell we must. When your stop loss price is hit you sell. This simple and straight forward rule protects your hard earned cash. - 23221
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posted by X - Men @ 4:54 AM
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