Jul
12
2010
Once you bought a stock and has started moving up, you do need to get as much profit as possible. Not being able to do so will make you a losing trader in the long run!
How can you lose if you only take small profits at a time? Isn't a profit always a profit?
Well ... Not exactly!
A profit of 200 is not the same as a profit of 500. If your 200 profit is followed by two losses of 190 each, your 200 profit will become an 180 loss, while an i.e. profit of 500 will just become an 120 win. Do you get the point?
Profits are always followed by losses and if the profits are small they will not make up for the losses that will eventually and most surely follow.
However, becoming too greedy can turn a small profit into a loss.
This will make you lose money in the long run. The best solution to resolving these conflicts is to use "Trailing Stops."
As the name says, trailing stops follow the stock price that is moving up.
For example, let's say that you bought 100 shares at 50 per share. You will automatically put your stop loss at 49.5.
Then the price starts moving upwards and reaches 51. At that point you don't want to get out of this trade without a profit.
You will now move your stop loss at 50.5. This means, that if the price starts getting down, you will hit your sell order once the price hits 50.5, and at least you will still make some profit from it.
If the price continues to move in the positive direction, you will keep adjusting your stop loss accordingly. If the price hits 51.5 you will move your stop loss to 51.
Once you are more deeply "in the money" you can start using your stop loss more liberally and give the stock price more breathing space. This means that if the price hits 53, you could put the stop loss at 52.
You will be able to do this because you have already made a profit and can afford a little more risk. You can also do this when the stock is in a clear upward trend.
While the U.S. Markets are constantly a Roller Coaster of energetic fun, one Rule stays true.
Whether we be in a Bull Market, or a Bear Market, you must ALWAYS keep a level head. Emotions cloud your judgment, and reduce your profits!
By always having STRICT Trading Rules set in place, you are sure to do better than the average investor.
Stop Losses, Trailing Stop Losses; Limit Orders are just some of the practices used by pros that can help you maximize your profits, while greatly reducing your downside (Risk).
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