In the trading world you have two options, learn fast or go broke. There is one big secret of trading that anyone who has ever been successful has mastered.
This secret is keeping your losses as small as possible and your wins as large as possible. Think about it as a business, because that is what trading is. You can only make money if you have supplies. Well in the stock market this supplies is cash.
“You need money to make money,” This phrase has been said over and over again but has been widely misinterpreted by the general public. Most people believe this means you have to be a millionaire in order for you to invest and make good money in the market.
Actually what they are saying is that in order for you to make money in the stock market you must have something in there. Even if you only have $1000 you can still invest in the markets and start pulling out money.
Because it takes money to make money you should take only small losses when you are wrong. You do not want one bad trade to completely destroy your account. Never overextending your account so you will lose half of your money on one trade is the key. Keeping your positions small and keeping stops tight can help you to maintain your account.
At the same time you are in the markets to make money not just to preserve your capitol. In addition to keeping your losses small, you should try to keep your wins large. Finding a good balance between these two works and is the key to trading successfully.
What I have found is keeping a target and a stop on a trade allows you to only take trades that offer you a large profit if you are right with a small loss if you are wrong. This way you can weed out trades that will not at least give you a chance to make $2 for every $1 you risk.
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