In trading the market, no-one has a crystal ball. The price of stocks can go down, as well as up. What's needed is an exit system that will permit you to survive the bad stocks, and make an excellent profit on the good stocks. The method that I have found to work well is a trailing stop loss. For those that don't know what a stop loss is, I shall explain briefly. A stop loss is an order for your stock broker to sell your shares if the price dips to the level that you have stated.
There are two ways of doing this. The most straightforward system is to decide on how much you are ready to lose as a percentage of your investment. A good rule isn't to go less than 10%. Work out the price of the stock at this level and set that as your stop loss. As the cost of the stock increases, keep moving the level of the stop up to keep the p.c. gap the same. Some brokers provide a trailing stop loss service, where you tell them what % to set the loss at and they do it for you.
The second system is slightly more convoluted, and comes from Nicolas Darvas in his book. How I made $2,000,000 in the Exchange? The markets have a tendency to flow in stages. A stock on the rise will reach a peak, and then dip back down. It may do this many times at each stage. The idea is to follow the chart of the stock and see where the dips are the lowest, and set the stop just below 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 just below 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 still tied up in the first stock that is falling cannot be used on another trade.
Eventually, a precautionary note about using the stop system to guard your capital. There are occasions when the markets undergoes a dramatic fall in price, there are regulations about how far a price can fall in one-day. If it falls this maximum distance, it can bypass your stop loss, and you could be unable to sell. Although these situations are uncommon, it is better that you know about them. So they aren't a shock when they do happen to you.
There are two ways of doing this. The most straightforward system is to decide on how much you are ready to lose as a percentage of your investment. A good rule isn't to go less than 10%. Work out the price of the stock at this level and set that as your stop loss. As the cost of the stock increases, keep moving the level of the stop up to keep the p.c. gap the same. Some brokers provide a trailing stop loss service, where you tell them what % to set the loss at and they do it for you.
The second system is slightly more convoluted, and comes from Nicolas Darvas in his book. How I made $2,000,000 in the Exchange? The markets have a tendency to flow in stages. A stock on the rise will reach a peak, and then dip back down. It may do this many times at each stage. The idea is to follow the chart of the stock and see where the dips are the lowest, and set the stop just below 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 just below 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 still tied up in the first stock that is falling cannot be used on another trade.
Eventually, a precautionary note about using the stop system to guard your capital. There are occasions when the markets undergoes a dramatic fall in price, there are regulations about how far a price can fall in one-day. If it falls this maximum distance, it can bypass your stop loss, and you could be unable to sell. Although these situations are uncommon, it is better that you know about them. So they aren't a shock when they do happen to you.
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