Two Little Four Letter Words. —
Weekly Ramblings of an Australian Stock Trader - incorporating
Random header image... Refresh for more!

Two Little Four Letter Words.

The two words that every share trader has to come to grips with every time that they trade are “Risk and Fear.” Combine the two of them and you have concocted a poisonous mixture.

As soon as you start with your first trade transaction you are leaving your self wide open to “Risk.” That is the risk of losing part or nearly all of your original capital.

The first loss you encounter which you have no control over is brokerage. The amount depends which stockbroker you have chosen to deal with. So the share price has to rise a little bit just for you to break even. If the share price decreases then the loss compounded.

One of the first things that will help you to overcome “Fear” and to survive in the share market is by using a trading plan and sticking to it. Without one you are doomed to eventually fail. For all you are doing is a hit and miss affair.

By using a trading plan the odds of your survival and trading success arc dramatically increased tenfold if not more. By having a trading plan and adhering to it does not a guarantee success just puts the odds more in your favor.

Now the action we take to protect our trading capital is a “Stop Loss.” This is also known as a conditional order.

Now before you set the stop loss in place you need to have planned in advance how much of your precious capital you are prepared to lose. Once you have agreed upon the stop loss and have put it into place you can then sit back happily knowing that you have done the best you can possibly do to save your trading capital.

In a successful trade the share price is rising and soon you are experiencing a paper profit. It is called a paper profit because as yet we haven’t as yet physically taken a profit. This only occurs when we sell the stock and not before.

Now we experience the risk and fear of losing that hard won profit. That is assuming that you have picked a preset level of profit according to your trading plan.

To safely lock in that profit we use a variant of the stop loss we first employed when we opened the trade. This is called a “Trailing Stop Loss.” The purpose of this is to follow the share price upwards and it effectively locks in your profit that you have made so far.

These stop losses are based on either a percentage or a dollar figure.
Most important of all is that they must be reviewed every day in case they need an adjustment. And when required do not procrastinate but do them straight away for it could cost you dearly.

By doing all of the above you have alleviated a lot of the risk and reduced your fear levels considerably which makes for sleeping better at night worry free.


There are no comments yet...

Kick things off by filling out the form below.

Leave a Comment