Stop losses are the key to becoming a successful trader who makes money. They're also the key to being a successful trader when you don't make money. Confused? Let me explain.
Every trader knows that successful trading requires more than a "fly by the seat of your pants" strategy. It requires patience and even more important, limits. Like in any good card game, you've got to know when to hold em and know when to fold em. So successful trading means that you have to know when to say when... even if it means you're going to lose some money. It's about limiting your risks, rather than increasing them.
A stop loss is a bottom line establishing the price you're willing to let a stock fall to before you take your loss and get out. It's a strategy that limits losses, while also establishing parameters for successful trading.
Successful trading requires more than winging it. Those who make money in the long run know that it requires a disciplined approach, one that establishes your exit plan at the time of entry. When you purchase your stock, you need to know how much you are willing and able to lose, should the stock fall. In other words, knowing when to say when can actually help you to minimize your losses-a component of successful trading.
On the other hand, successful trading also means that you must know when to exit even when you're making money. Are you satisfied with a 10 percent profit, or do you need to aim higher? Finding the magic numbers on both ends of the spectrum will ensure that you get out while a stock is still profitable, and before it falls, and it will minimize your risk (losses) in the event it does fall.
Why sell when your stock is on the upswing? Ask that question to the thousands of traders who watched their stock climb, only to wake up one day and find that it took a huge hit. Smacking themselves upside the head, they could kick themselves, as well, for not selling the day before! The same holds true for traders who hang onto a falling stock too long-hoping that it would eventually rise again, they wait it out and instead of losing 10 or 15%, they suffer losses in the range of 50 percent or more. If these traders had had an exit strategy, they'd be making more money.
In essence, you're following the same investment principles that successful traders already know. There will be times when you make a profit. There will be times when you don't. Successful trading isn't how much money you make, as much as it's about staying true to the guidelines you've set to buy and sell when it's time. If you stick to your exit strategy, whether you profit or don't, you're more likely to make money in the long run. Enjoying many smaller profits, and limiting your losses, is a winning strategy. In other words, a disciplined exit strategy stops your losses from wiping your profits out.
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