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Using Stop-Losses

17 August 2008

This is one of the most important elements of trading if not the most important. However, this is the most often overlooked aspect of trading and investing. Egos and pride often are at the root of this problem and the consequences are the annihilation of the individual’s portfolio.

Every trade that is entered into, must have a stop-loss attached to it. It is simply asinine to not do so, especially if you are a retail trader that only reviews their positions periodically. Even the best of positions can go from being the market’s darling to being cut in half or worse within days. No one is immune to substantial losses in a portfolio and we are no better. In fact, we pay much more attention to this aspect of our trading then any other. Controlling losses will keep you from portfolio ruin.

Typically our stop losses run anywhere between 5%-12% on each position. We don’t lower our stop losses under any circumstances. If a stock triggers our stop-loss, we take the loss and move on to the next position. Under no circumstance do we ever tell ourselves that, “we will sell it as soon as we break even”. That is what losers do and we don’t consider ourselves a part of that mindset. Better yet, it's almost like your asking Mr. Market to forgive you of your past sins and by doing so you will sell your position at the first opportunity to break even on the stock. It just doesn't make sense.

Another problem often seen in the markets and by individual traders is the ideal that a position that is already looking at losses, is a buying opportunity. Let us be frank: “Losers average Losers!” We don’t average down as other do, thinking that because the stock is lower, we now have an even lower entry price that is more favorable, that we should easily be able to make up the loss. Instead, we take the loss (assuming that our stop-loss hits) and as a result the loss is a minor one on an initial position – not a whole position or a position that has been “doubled-down”. Instead we average into winners, and that is a strategy that works far better.

Therefore we stick to the old adage of "letting our winners run, and cutting our losers short." Simple as that! var dc_AdLinkColor = '#006400' ; var dc_UnitID = 14 ; var dc_PublisherID = 61230 ; var dc_adprod = 'ADL' ; Be sure to Join SharePlanner's Real-Time Trading Network for Free!