Saturday 15 October 2011

Don’t Let Your Losers Become Big Losers


Don’t Let Your Losers Become Big Losers
So with my Trailing Stop Strategy, when would I have gotten out of the failing muscle-shirt business? You already know the answer.
Remember, the shares started at $10 and fell immediately. Instead of waiting around until they fell to $6 as the business faltered, using my 25% Trailing Stop, I would have sold out at $7.50. And think of it this way – if the shares fall to $8, you’re only asking for a 25% gain to get back to where they started. But if the shares fell to $5, you’re asking for a dog of a stock to rise 100%. This only happens once in a blue moon – not good odds!
Take a look at how hard it is to get back to break even after a big loss...

You’ll Never Recover

Percent fall in share price
Percent gain required to get you back to even
10%
11%
20%
25%
25%
33%
50%
100%
75%
300%
90%
900%
So what’s so magical about the 25% number? Nothing in particular – it’s the discipline that matters. Many professional traders actually use much tighter stops.
Ultimately, the point is that you never want to be in the position where a stock has fallen by 50% or more. This means that stock has to rise by 100% or more just to get you back to where it was when you bought it. By using this Trailing Stop Strategy, chances are you’ll never be in this position again.




http://www.dailywealth.com/1041/Don-t-Lose-Money-The-Most-Important-Law-of-Lasting-Wealth

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