Trading without a stop-loss is like jumping out of a plane without a parachute, yet most first time investors don’t take the time to place this simple order.
http://www.ianbritton.co.uk/
Simply put, a stop-loss order is an order placed with your broker to sell your position once the asset drops to a certain price.
Well if trading without a stop-loss is like jumping out of a plane with no parachute, then trading without a profit-limit is like taking a hot air balloon up for the rest of your life. You may not think there’s such a bad thing about unlimited profit but if you don’t have a target goal price then you are really just jumping in and hoping the price goes up.
When you first evaluate your trade and decide to buy in the first place, you should have an “I’m wrong” and “I’m right” prices in mind. The “I’m wrong” price is your stop-loss. It is when you can say o.k. market stop twisting my arm! I’ll get out!
Your “I’m right” price is your goal price. It’s what you were hoping to see the price go to based on your initial evaluation.
Feel free to change these orders as you see fit. You may reevaluate and find out that your stop-loss is too tight or your profit-limit is too loose or vice-versa. That will have an effect on your overall stock returns and portfolio profitability.
You also will need to reevaluate an place these stop and limit orders every time they are canceled if you are trading stocks with certain brokers. You may have to selected Good Til Canceled and the time frame varies with brokers. Some will allow your order to stay in for anywhere from 30-90 days. In the futures and forex market, your stop and limit orders will stay with the trade you placed, once again depending on the broker.
Check your trades and don’t go in without some protection!
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2 comments
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Savvy Scot says:
February 16, 2012 at 10:46 am (UTC -4 )
You make a very valid point here – especially on the profit limits. Thanks for the good advice – I enjoy your blog
MoneyCone says:
February 16, 2012 at 3:48 pm (UTC -4 )
Good points LaTisha! Also, practice this ‘skill’ in a tax deferred account! You don’t want unpleasant tax surprises at the end of the year!
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