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Taking
a Loss Can Improve Your Gains |
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| Being a successful stock
trader/investor does not require an individual to time
every trade perfectly or be invested properly for
every market trend. Truly successful
investors, must learn not to let their emotions
control their stock trading. Successful traders must
possess the ability to cut their losses. Fortunes have
been lost by individuals sitting there watching their
stock drop while they nervously try to convince
themselves that the stock will eventually come back.
The true key to being successful stock trader/investor
is knowing when to cut your losses and allowing winners
to run and reach their full potential. If these
two strategies are implemented properly even an
investor who is only correct 50% of the time can make
a substantial amount of money in the market. Both
long-term investors and short-term stock traders
should apply this simple practice. The chart below represents a simplified example of this
technique being implemented. The example is
demonstrated using short-term trades, but if the time
frame between trades were extended it would be
representative of a longer-term investment. |
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| Example
of five stock losses capped at 10%: |
| Stock
Bought/Sold |
Date |
Number
of Shares |
Stock
Price |
Profit/Loss |
Percent
Profit/Loss |
| Bought
Stock (AAA) |
11-20-99 |
1000 |
$25.00 |
$2,500 |
10% |
| Sold
Stock (AAA) |
11-25-99 |
1000 |
$22.50 |
| Bought
Stock (BBB) |
11-15-99 |
500 |
$47.00 |
$2,350 |
10% |
| Sold
Stock (BBB) |
11-18-99 |
500 |
$42.30 |
| Bought
Stock (CCC) |
11-8-99 |
500 |
$47.00 |
$2,350 |
10% |
| Sold
Stock (CCC) |
11-17-99 |
500 |
$42.30 |
| Bought
Stock (DDD) |
10-15-99 |
1000 |
$10.00 |
$1,000 |
10% |
| Sold
Stock (DDD) |
11-1-99 |
1000 |
$9.00 |
| Bought
Stock (EEE) |
10-12-99 |
1000 |
$15.00 |
$1,500 |
10% |
| Sold
Stock (EEE) |
10-10-99 |
1000 |
$13.50 |
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| .Example
of 5 winning stock trades: |
| Stock
Bought/Sold |
Date |
Number
of Shares |
Stock
Price |
Profit/Loss |
Percent
Profit/Loss |
| Bought
Stock (FFF) |
11-17-99 |
1000 |
$24.50 |
$7,350 |
30% |
| Sold
Stock (FFF) |
11-20-99 |
1000 |
$31.85 |
| Bought
Stock (GGG) |
11-21-99 |
500 |
$45.00 |
$2,250 |
10% |
| Sold
Stock (GGG) |
11-27-99 |
500 |
$49.50 |
| Bought
Stock (HHH) |
12-1-99 |
500 |
$47.00 |
$9,400 |
40% |
| Sold
Stock (HHH) |
12-15-99 |
500 |
$65.80 |
| Bought
Stock (DDD) |
12-17-99 |
1000 |
$11.00 |
$2,200 |
20% |
| Sold
Stock (DDD) |
12-19-99 |
1000 |
$13.20 |
| Bought
Stock (EEE) |
12-23-99 |
1000 |
$17.00 |
$5,100 |
30% |
| Sold
Stock (EEE) |
12-30-99 |
1000 |
$22.10 |
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| The trader in this
example cut his stock losses at 10% but allowed his winning trades to run until the stock began to
show technical weakness and then took his profits. The
trader placed the same number of winning trades and
losing trades, used roughly the same amount of
capital to initiate each group of trades, but
ultimately made a profit. The overall profit from this
portfolio was $18,950, or almost a 10% return, a pretty
impressive gain for a trader who was only correct 50%
of the time. |
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