In trading the stock exchange, nobody has a crystal ball. The cost of stocks can go down, as well as up. What is required is an exit methodology that will enable you to survive the bad stocks, and make the best profit on the good stocks. The strategy that I have found to work best is a trailing stop loss. For people that don't know what a stop loss is, I shall explain quickly. A stop loss is an order for your stock broker to sell your stock if the price dips to the level that you have cited.
There are 2 ways of doing this. The simplest system is to fix on how much you are prepared to lose as a proportion of your investment. A good rule isn't to go less than 10%. Work out the cost of the stock at this level and set that as your stop-loss. As the price of the stock increases, keep moving the level of the stop up to keep the percentage gap 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 strategy is slightly more complicated, 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 rising will reach a top, 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 stop loss 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 fast to it, and not lower it, thinking that the price will go up again in a couple of days. In a few cases you will be right, but what usually occurs is the price keeps moving against you, and you loose far more cash. As a secondary to this, the money still tied up in the first stock that's falling can't be used on another trade.
Eventually, a precautionary note about using the stop loss system to guard your capital. There are occasions 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 stoploss, and you could be unable to sell. Although these scenarios are uncommon, it's way better that you know about them. So they aren't a shock when they do happen to you.
There are 2 ways of doing this. The simplest system is to fix on how much you are prepared to lose as a proportion of your investment. A good rule isn't to go less than 10%. Work out the cost of the stock at this level and set that as your stop-loss. As the price of the stock increases, keep moving the level of the stop up to keep the percentage gap 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 strategy is slightly more complicated, 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 rising will reach a top, 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 stop loss 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 fast to it, and not lower it, thinking that the price will go up again in a couple of days. In a few cases you will be right, but what usually occurs is the price keeps moving against you, and you loose far more cash. As a secondary to this, the money still tied up in the first stock that's falling can't be used on another trade.
Eventually, a precautionary note about using the stop loss system to guard your capital. There are occasions 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 stoploss, and you could be unable to sell. Although these scenarios are uncommon, it's way better that you know about them. So they aren't a shock when they do happen to you.
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