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How Stops Help You To Make Money In The Stock Market
By: David Jenyns
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.
About the Author:
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 |
