Monday, October 27, 2008

Never Move Your Stops Down

It is very tempting to move your stops down during times of panic. It becomes even harder when you believe the market is overreacting to bad news. But holding your ground is absolutely critical when trading.

When you buy a stock you need to have a stop level. This is a level that is the most you are willing to lose on that one trade. It is the point where you say if the stock reaches this level I am pulling the plug and getting out with my losses.

Following through with that level is very important. Only by managing your risk and cutting your losses short can you be able to last in the stock market. If you only lose 2-5% of your account on 1 trade it will not affect you too much. You will still be able to come back without too much difficulty.

Ok, but stocks pull back and recover right? This type of thinking is what causes new investors to stay in a trade too long and watch their accounts go down. The fact is stocks can fall for a while. Strong stocks normally don’t just fall for 10 or 20% before they start to turn around.

Many stocks can fall 50%, 60%, or more before they start to turn around. And some stocks might never turn around. The last thing you want to do is hold a stock through a 50% decline.

On the other hand if you do not move your stop level lower you can exit the trade for a smaller loss and can look for better opportunity elsewhere. There is always opportunity to make money in the stock market so holding your stock through a 50% decline can be useless.

Remember the stock market is a battle field, holding your ground when it comes to following your rules is a must.

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