Trading in the stock market can lead to huge gains, which is why many people will flock to it as a way for them to finally quit their jobs. The problem is that it can also have large losses.
Because of this your first concern should be to protect yourself from taking big losses. You want to preserve your capital so that you still have the majority of your account left, even if you get into a few bad trades in a row.
Let’s look at an example, say you find a stock trading at $50 and expect it to move up in the short term. That could work out great if it goes our way, but if it doesn’t it could potentially be devastating to our account.
Because of this it is often a good idea to have a stop order in place so you can cut your losses short. Instead we bought the stock expecting it to make a big move and put a stop at around $45 so we would exit just in case the trade turns against us.
Now our potential gain unlimited but our max loss is only $5, which is only a small percentage of the total trade. By cutting your losses short you can.
1. Avoid Destroying Your Account With 1 Big Loss
You don’t want to have 1 have 1 bad trade completely destroy your account. That isn’t exactly a smart thing to do, everyone will be wrong from time to time so you need to cut your losses if you want to last as a trader.
2. Make Money Without a high win Ratio
It is hard to be right the majority of the time. But you can be
very profitable by cutting your losses short when you are wrong and letting your winners ride when you are right. If you only lose 5 when you are wrong but make $20 when you are right you do not have to be right a lot to be a profitable trader.
For more on protecting losses visit http://www.stocks-simplified.com/Chart_patterns_that_fail.hmtl
For more on the stock market visit http://www.stocks-simplified.com
When I was young I wanted to learn how to trade the stock market. So I traveled around the country listening to professional traders talk about how they are making money in the market. Now I understand how easy it is to make money in the stock market and started a site stocks-simplified.com to help others learn.