In trading the stock market, no-one has a crystal ball. The price of stocks can go down, as well as up. What's needed is an exit methodology that will enable you to survive the bad stocks, and make the best profit on the good stocks. The technique that I've found to work best is a trailing stop loss. For those who 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 specified.
There are two ways of doing this. The simplest system is to decide on how much you are prepared to lose as a percentage of your investment. A good rule is not 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 percentage opening the same. Some brokers provide a trailing stop loss service, where you tell them what percentage to set the loss at and they do it for you.
The second method is a little more difficult, and comes from Nicolas Darvas in his book. How I made $2,000,000 in the Stockmarket? 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 every stage. The basic idea is to follow the chart of the stock and see where the dips are the lowest, and set the stoploss 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 slightly under the lowest part of the dip.
Using the stop loss as an exit strategy, only works if you stick fast to it, and not lower it, thinking that the price will go up again in 1 or 2 days. In a few cases you will be right, but what usually occurs is the price keeps moving against you, and you loose even more money. As a secondary to this, the cash still tied up in the 1st stock that's falling cannot be used on another trade.
Ultimately, a precautionary note about using the stop loss system to guard your capital. There are times when the markets undergoes a fast fall in price, there are rules about how far a price can fall in one-day. If it falls this maximum distance, it can bypass your stop loss, and you may be unable to sell. Though these situations aren't common, it's miles better that you know about them. In order that they are not a shock when they do happen to you.
There are two ways of doing this. The simplest system is to decide on how much you are prepared to lose as a percentage of your investment. A good rule is not 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 percentage opening the same. Some brokers provide a trailing stop loss service, where you tell them what percentage to set the loss at and they do it for you.
The second method is a little more difficult, and comes from Nicolas Darvas in his book. How I made $2,000,000 in the Stockmarket? 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 every stage. The basic idea is to follow the chart of the stock and see where the dips are the lowest, and set the stoploss 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 slightly under the lowest part of the dip.
Using the stop loss as an exit strategy, only works if you stick fast to it, and not lower it, thinking that the price will go up again in 1 or 2 days. In a few cases you will be right, but what usually occurs is the price keeps moving against you, and you loose even more money. As a secondary to this, the cash still tied up in the 1st stock that's falling cannot be used on another trade.
Ultimately, a precautionary note about using the stop loss system to guard your capital. There are times when the markets undergoes a fast fall in price, there are rules about how far a price can fall in one-day. If it falls this maximum distance, it can bypass your stop loss, and you may be unable to sell. Though these situations aren't common, it's miles better that you know about them. In order that they are not a shock when they do happen to you.
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