4 May 2021, 15:30
The Number 1 Greatest Fear of most investors is losing lots of money from their investments. While things can go swimmingly well today, it’s hard to predict what your stocks could look like in a year’s time? With stocks now climbing up to their all-time highs, they can fall like a stack of cards like in 2008.
Most investors would perhaps be happy to pray to the stock market gods and hope that their stock prices increase in value. However, we all know from past experience that this is not always the case. Many stocks fell by 50% during the 2008 stock market crash. And many have to endure astronomical paper losses.
Do you need to do that?
While we have no control over the stock prices, we certainly could control our actions in the stock market. If stock prices fall, we could choose (1) endure the losses and pray that the prices will recover again or (2) cut our losses and wait to enter at better prices. Most investors would choose option 1 as their egos would not accept them getting out of their stocks with losses. The smarter option is Option 2.
The smarter investors cut losses quickly and get out of losing trades. Just imagine if you had bought your stock at $100 and it drops to $90, if you had gotten out at this price, you would have made just a 10% loss. Is it hard to endure a 10% loss? Will it make a huge dent to your portfolio budget? I don’t think so. But, just imagine if you had not gotten out and the stock now plunges to $50, now you would be in huge trouble.
It is not how much you win in the stock market; it is how much you lose that counts. If you had gotten out at $90, would you have enough money to buy back the stock at $30 when the stock is ready to make a reversal? I bet that would be the smartest way to get quicker profits from the stock market.
Therefore, how could you get out at $90 if you could not monitor the stock market all the time? Simply set up your stop losses. Stop losses are a trader’s best friend. It helps you get out of losing trades with small losses without the need to manually exit. Find a broker which could enable you to set automatic stops that can immediately trigger your exit once the stock price drops down to $90.
This is a simple mechanism that you can use to protect yourself. Remember that while you have no way to control over where prices can go, you certainly have the power to control your exits.
Now, by just applying the stop loss on every trade you make in the future, you can sleep easy at night without worrying about losing more than you can afford.