Saturday, August 23, 2008
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Thursday, June 5, 2008
Proper Stock Selection And Stop Loss Setting Techniques
Uncertainty is an emotion that we all have to face and conquer in order to become successful stock traders.
A stock trader only truly develops the trust in judgment and confidence needed to pull the trigger by making mistakes; lots of them in the beginning. Good traders usually have more losing trades than winning stock trades. The key is to keep the losses small and let the winners run as long as possible.
The only way to get the learning experiences that really sinks in is to trade, right or wrong, with real cash. Position-sizing is a money/risk management technique that has been discussed numerous times. But it can also be used from an emotion management perspective - size the trade to your confidence level (I think a lot of us do this intuitively). Review all your trades to learn from both winners and losers. I often talk with traders who say they feel paralyzed, of like a “deer in the headlights”, having made some bad trades and just don’t feel comfortable with their decision making abilities anymore.
My advice to them is always the same – cut down on your position size until you get your confidence back. There is no way to imitate the feeling of having your hard earned money on the line, so paper trading just doesn’t work, but when you are not “feeling it”, it is always better to risk less.
So how does this relate to stock selection and setting stop losses?
In general, I tend to try and choose stocks that have clearly defined support areas within 10% to the downside of my entry. By clearly defined stop losses I am referring to a price level, trendline, channel or moving average, where that particular security has seen buyers stepping in and boosting the stock price up at some point in the recent past.
Here are a few examples:
With a tight loss-cut rule of 7-8%, I am particular about the entry points to avoid being stopped-out. While the 'potential gain at least twice the loss' you note is a good adage, it also needs to be tailored to one's draw-down or loss-cut approach on an initial position.
For more discussions on stock selection and how to set stop losses please see my website, http:www.greenroomstocks.com
Happy trading!
A stock trader only truly develops the trust in judgment and confidence needed to pull the trigger by making mistakes; lots of them in the beginning. Good traders usually have more losing trades than winning stock trades. The key is to keep the losses small and let the winners run as long as possible.
The only way to get the learning experiences that really sinks in is to trade, right or wrong, with real cash. Position-sizing is a money/risk management technique that has been discussed numerous times. But it can also be used from an emotion management perspective - size the trade to your confidence level (I think a lot of us do this intuitively). Review all your trades to learn from both winners and losers. I often talk with traders who say they feel paralyzed, of like a “deer in the headlights”, having made some bad trades and just don’t feel comfortable with their decision making abilities anymore.
My advice to them is always the same – cut down on your position size until you get your confidence back. There is no way to imitate the feeling of having your hard earned money on the line, so paper trading just doesn’t work, but when you are not “feeling it”, it is always better to risk less.
So how does this relate to stock selection and setting stop losses?
In general, I tend to try and choose stocks that have clearly defined support areas within 10% to the downside of my entry. By clearly defined stop losses I am referring to a price level, trendline, channel or moving average, where that particular security has seen buyers stepping in and boosting the stock price up at some point in the recent past.
Here are a few examples:
Charts Courtesy of Worden Bros Inc.
With a tight loss-cut rule of 7-8%, I am particular about the entry points to avoid being stopped-out. While the 'potential gain at least twice the loss' you note is a good adage, it also needs to be tailored to one's draw-down or loss-cut approach on an initial position.
For more discussions on stock selection and how to set stop losses please see my website, http:www.greenroomstocks.com
Happy trading!
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