How to Make Money Through Using A Stop Loss in Stock Investing
Even the best trading techniques struggle to deliver a success rate of more than 70%. Therefore even using some of the best trading techniques we will still end up with two or three losing trades out of every ten. For these losing trades we must keep our losses really really small. To do this we use a stop loss. This is a pre-determined price that we use as the trigger to sell out of a losing trade.
There are only five possible outcomes from any trade:
Breakeven
A small profit.
Breakeven.
A large loss.
A large loss.
That’s it. Five possible outcomes, no more, no less. If you could eliminate one of these five outcomes, which one would you choose? That’s right – the large loss. If you eliminate the large loss you are only left with the other four possible outcomes. If our small losses, breakeven trades and small profits even out over a period of time you will only be left with the occasional large profit, a rather pleasing outcome.
By now you should be in no doubt about the wisdom of eliminating large losses. The Stop Loss is what we use in every trade in order to eliminate any large losses.
We use a Stop Loss Rule. The stop loss rule has three parts to it:
1. You must have a Stop Loss in place for every single trade that you do.
2. Your Stop Loss price is set at the level where your loss will be 2% of total trading capital.
3. When your Stop Loss price is hit then you sell.
For those new to share trading, and maybe some not so new, the most difficult part of this rule is part 3, selling when your stop loss price is hit. It’s the most difficult part of the rule because it brings into play your emotions. And of course our ego pops up and it just hates admitting that we were wrong about anything! Despite this huge emotional drag not to sell – sell we must. When your stop loss price is hit you sell. This simple and straight forward rule protects your hard earned cash.