Unfortunately when it comes to trading in the stock market, no-one possesses a crystal ball. Which will come as surprise to some traders particularly when there are so many so called experts around who will sell you a system that guarantees wonderful returns for open access to your wallet.
If I owned such a money making system I would not be writting this article. I would be lazing on a beach,drink in hand, soaking up the sun.So saying that let us get to the point in hand.
The price of stocks will aways go down as well as up. This is a guaranteed fact of life and this is not about to change any time soon. So what we need is an exit strategy that will enable you to survive the poor stocks you happened to choose previously, and to make a good profit from the good stocks and then to hang on to them.
The best System that I have found over time to work the most reliably is a trailing stop loss. For those who don’t know or have never heard of what a stop loss is, I shall explain very briefly.
All a stop loss is a conditional order that is placed with your stock broker to sell your shares immediately if the price drops down to the level that you have previously specified. Thus minimizing your losses
There are two ways of doing this.
The most uncomplicated method is to decide before you put your trade on, exactly how much you are comfortable to lose as a percentage of your investment. A good rule of thumb is not to go less than 10%.Or if that seems too high, you can always work out a percentage which you are more comfortable with.There are no hard and fast rules with this.
We shall assume that you have worked out the price of the stock at this level and have already set that as your stop loss. Ok! Now as the price of the stock increases upwards, you can keep moving the level of the stop upwards, this is to keep the percentage gap exactly the same as you previously set.
If you are lucky you might be already using a broker that offers a trailing stop loss service.This is excellent, for you can now tell them exactly what percentage to set the stop loss at, and they will do it for you.
The second method that is used is slightly more complicated, and comes from “Nicolas Darvas” in his book “How I made $2,000,000 in the Stock Market”. I highly reccomend you buy it ,if you have not already done so .(There is a Darvas Flow sheet available for free in the free Ebook section of www.asxnewbie.com)
Darvas stated the markets tends to flow in stages. For instance a stock on the rise will reach a peak,and then drop back down. It may do this several times at each stage. Darvas’s idea was to follow the chart of the stock and ascertain exactly where the dips were the lowest. And then to set the stop loss just below them where they occurred.
A second method which Nicolas Darvas also suggested was that when the stock had broken out of the sideways trend, that was then the time to go and buy more of the same stock, and when this stock started going sideways again to then make sure you moved the stop loss up again to just below the lowest part of the dip.
Remember that using the stop loss as an exit strategy,only works if you adhere to it, So do not lower it, thinking that the share price will go up again in a few days. On the odd occaison you will be right, but what usually occurs is that the share price keeps moving against you, and you lose even more money than you originally intended.
Plus as a secondary to this, your money which is still tied up in the first stock that is falling can’t be used on another trade..
Lastly, a word of warning about using the stop loss method to protect your capital and your profits. There will occaisonally be times when the markets undergoes a very rapid fall in price.
When this unfortunate turn of events happen it can completely bypass your stop loss, and you may be unable to sell in time. Although these situations are somewhat rare, it is far better that you know about them now. So that they will not be such a shock when they do happen to you.
Enjoy profitable trading.
Chris Strudwick is a successful share trader on the Australian Stock Market Visit his weblogs at both http://www.asxnewbie.com AND http://www.aussie-retiree.com/ formore free articles and useful information about the stock market.
