This archive report was first published on 30 October 2019.
Protect Your Money: Two Essential Strategies for Stock Investors ¶
Buying a stock is just the beginning of the journey for investors. The actual work starts after the purchase, as the steps taken after buying can make all the difference between a well-earned profit and a disappointing loss.
Stock prices are influenced by numerous factors, and the price can unexpectedly rise or fall significantly without your knowledge. To increase your chances of gain and minimize loss, two strategies are commonly used: pyramiding and cutting losses.
Pyramiding involves cashing out in stages by reducing your position as the price rises. This strategy allows you to continuously reduce your risk and take money off the table at regular intervals during the rise. It is essential to have decided on your first target exit position before buying the stock, which should be a percentage gain you are comfortable with.
On the other hand, cutting losses involves selling your stocks at a pre-determined price, known as a stop-loss. The stop-loss should not go beyond 10% loss, as the percentage increase needed to get back to an even position increases rapidly beyond this point.
Many investors fail to cut losses, hoping that the market will reverse and move in their favor. However, hope is not a strategy in managing stocks. Those who are aware of this fact always cut their losses, knowing they can always buy back the stock further down if they still have an interest.
As William J. O'Neil, author of the book 'How to Trade Stocks,' says, 'The whole secret to winning in stocks is to lose the least amount possible when you are not right.' George Soros also emphasizes the importance of managing losses, stating, 'It is not whether you are right or wrong that is important, but how much you make when you are right and how much you lose when you are wrong.'
Pyramiding and cutting losses are two essential money management strategies in stock trading that will greatly increase your probability of success while protecting your capital and gains made.
