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How To Stop Losing Money Using Stop Losses

Friday, January 25, 2013

There is nothing stable about the markets. They are extremely volatile and can change from one second to the next. That's why it’s important that you are a smart investor and know how to protect yourself and avoid losing all of your money when things start to go south. One such way to do this is to use stop losses.

To set up a stop loss you have to decide up front how much you are willing to lose before you sell that stock off. And doing it this way is actually the best way to go because you haven't invested any of your money yet which means you are more objective. Once you have invested money it becomes emotional and you can easily end up making bad decisions.

Of course everyone has a different opinion when it comes to stop losses and what percentage you should use. I am going to give you my opinion and you can use this information as a guide to help you come up with your own percentages as you become a more savvy investor.

25% is a good stop loss percent to use. That means if you are investing $1000 once it falls to $250 you would sell it. That way you would be left with $750 instead of losing the whole $1000. Generally speaking you will find that a stop loss in the range of 21% - 27% will get you the best results.

If you set the stop loss too low it will cause you to stop out of investments too often. On the other hand, if you set the stop loss too high you can lose a lot of money before selling off the stock. Its really a delicate balance. You don't want to lose too much and you don't want to stop it too soon as it could turn around and go back up.

That's really the basics of how to stop losing money using stop losses. But let me just give you a quick little warning. When your money is on the line it can be very hard to stick with the plan. Many times your emotions will come into play and override all of your sensibilities.

You will see a stock going down but you will hold on to it as long as you can because you think it might come back up. It will be the hardest thing ever for you to take the 25% loss because you are hoping and praying the stock will rise again.

Don't be that person. If you set a stop loss stick with it. Because if you don't the scenario usually plays out like this. Instead of going up the stock no goes down by 35%. You continue to hold on to it and then it goes down by 50%. At this point you are in a panic and hold on to the stock because you want to recover at least some of your money.

Then it drops by 75%, then 90% and then all of your money is gone. So you can either lose all of your money or you can use the stop loss and only risk losing 25% of your money. I think we all know what the better option is here.

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