In trading the market, nobody has a crystal ball. The cost of stocks can go down in addition to up. What’s required is an exit plan that will permit you to survive the bad stocks, and make an excellent profit on the good stocks. The strategy that I’ve found to work well is a trailing stop loss. For people that don’t know what a stop loss is, I shall explain quickly. A stop loss is an order for your stock broker to sell your stock if the price dips to the level that you have cited.

There are 2 ways of doing this. The simplest technique is to select how much you are ready to lose as a proportion of your investment. A good rule isn’t to go less than ten percent. Work out the cost of the stock at this level and set that as your stoploss. As the cost of the stock increases, keep moving the level of the stop up to keep the p.c. opening the same. Some brokers provide a trailing stop loss service, where you tell them what % to set the loss at and they do it for you.

The second method is slightly more complicated, and comes from “Nicolas Darvas” in his book “How I made $2,000,000 in the Stock Market”. The markets tend to flow in stages. a stock on the rise will reach a peak, and then dip back down. It may do this several times at each stage. The idea is to follow the chart of the stock and see where the dips are the lowest, and set the stop loss just below them. A second part which Nicolas propounds is that when the stock breaks out of the sideways trend, to buy more of the stock, and when the stock starts going sideways again to move the stop loss up again to just below the lowest part of the dip.

Using the stop loss as an exit system, only works if you stick to it, and not lower it, thinking the price will go up again in one or two days. In one or two cases you’ll be right, but what customarily occurs is the price keeps moving against you, and you loose far more cash. As a secondary to this, the cash still tied up in the 1st stock that’s falling can not be used on another trade.

Finally, a word of warning about using the stop loss system to protect your capital. There are times when the markets undergoes a fast fall in price, there are regulations about how far a price can fall in one-day. If it falls this maximum distance, it can bypass your stop loss, and you may be unable to sell. Although these situations are rare, it is better that you know about them. So that they are not a shock when they do happen to you.

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