The whole secret to winning big in the stock market is not to be right all the time, but to lose the least amount possible when you’re wrong.” – William J. O’Neil, MarketSmith Founder
In the last week’s article, we discussed about investor biases. We hope that you found that article useful. Today, we move on to a new topic – an important one that is aimed at helping you realize profits in an unpredictable market environment.
The goal of trading is to be profitable, however, not all trades end up in profit, and some make losses. A successful strategy is the one that will help realize profits and cut losses short. But, there will be times when you booked your profits and find that the stock price is still going up and looks strong. At some point, you might get a feeling that your decision was wrong and you could have made higher profits had you waited. This is typical human nature. As an investor, you should focus on making enough profit and not get carried away by emotions, because if you do not book your profits, you may get caught in a sharp correction that can hit markets and put downside pressure on your portfolio.
If you don’t sell early, you will be late. The object is to make and take significant gains and not get excited, optimistic, greedy, or emotionally carried away as your stock’s advance gets stronger. Keep in mind the old saying: “Bulls make money and bears make money, but pigs get slaughtered.”
The basic objective of every account should be to show a net profit. To retain your hard earned money, you must sell and take these profits. The key is to know exactly when to do that.
The CANSLIM method has set certain criteria with respect to selling a stock:
1. Exit if the stock prices breaches the 50-DMA
2. Stop loss exit, if the stock falls 8% from the recommended entry price.
If you are a strict follower of CANSLIM, and if you fail to book early profits thinking that the prices will still go up, then you could end up exiting with loss if a correction sets in. So, how does one avoid that loss? In this article, we are trying to show you an alternative way to determine when to hold or sell a stock by using a feature known as trailing stop loss on the chart.
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