If you want to become a successful investor online, you need to learn to cut your losses with each and every trade that goes bad. Did you know that some of the best traders in the world don’t even win 50% of the time? You don’t have to be right every trade to make money investing online, but you do have to be smart.
Stock Trading Tip 3
Cut your losses always to a maximum of 5 - 8% to prevent portfolio disaster.
By cutting your losses 5 - 8% you will be limiting the bleeding on those trades that just didn’t go right. The math speaks for itself because if you are down let’s say 30% on one stock, then you will need to do substantial growth to make it back. Let’s take an example:
Stock XYZ
Purchase Price: $100
Last Price: $80
So, in this case we are down 20% on stock XYZ, and to make our money back we need the stock to move back to $100. To do that though the stock will have to move up 25%, not 20%. Take that one stop further and let’s say Stock XYZ is at $50 a share and we are down 50%, to get our money back the stock will have to double and move up 100%.
By maximizing our losses and letting our runners run, we can make money with a lower success ratio.
What this means is that if we ALWAYS maximize our losses to 5% per trade (which can be done very simply through stop loss orders), and we always sell our stocks after they go up 20%, we only need to be right 25% of the time to run a profitable portfolio.
How is this possible? Well, let’s take an example and say we have $10,000 to invest, and we buy 4 different stocks each with $2,500. We’ll say that 3 are losses that we were stopped out at 5%, and one was a winner for 20% where we sold:
- $2,500 x 5% Loss = - $125
- $2,500 x 5% Loss = - $125
- $2,500 x 5% Loss = - $125
- $2,500 x 20% Gain = + $500
End Result, + $125.
You can play with this math any way you like, but it will come up the same each and every time. If you can get into the habit of maximizing your losses and letting your runners run, you can and will be a great at online stock trading.
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