To make money in the stock market, setting stops is an imprecise
science and involves a lot of trial and error, but it is an
integral part of being a successful trader. A good analogy is to
compare stops to buying insurance for your business. Should you
avoid insurance altogether just because you're not sure exactly
how much you need, or because it will cost you a little money?
No. Instead, you estimate and do the best you can, and in the
end it will be well worth the effort.
Where insurance limits risk of loss through disasters, stops
limit your risk of loss on bad trades. Stops make it possible to
take small losses and get out when a stock goes against you,
protecting your capital. Yet, some traders find that they are
unwilling to take a loss on any stock. They don't want to admit
that they made a mistake.
Another key to make money in the stock market, what often
separates a good trader from a bad one is the ability to take
small losses. Your goal, as a successful trader, is to take
small losses and make big gains. If you do this, you'll be
profitable. But, you ask, what if you stop out of a stock you
still want to trade? Well, you can always buy it back later, and
likely at a better price, if the trade still has potential.
Besides limiting risk and helping you take small losses, stops
are valuable because they protect profits on winning trades. As
I discussed in a previous article, you must lock in your profit
when you trade, or you can lose it. You can ensure that you keep
your profits by using trailing stops. A trailing stop is a stop
order you place below the current price of a long position,
progressively moving it up as the price of the position
increases so that the stop follows the position up. For a short
position, to make money in the stock market you set a stop above
the current price and then move it progressively down, following
the position as it trends downward.
This means that once you have a profit, you move your stop
nearer to the current price so you'll stop out with most of your
profits intact if the position moves against you. If the stop
executes and you decide you want to trade the position again,
you can buy it back at a better price than you sold it for and
then ride it up again. That's how a good trader makes and keeps
money, make money in the stock market by taking small profits
multiple times, rather than risking too much waiting for a big
win.
Discover BIG profits from the market by downloading your FREE
copy of David's new Ultimate Stock Trading Systems course. http:/
/www.ultimate-trading-systems.com/stocks.html
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