You tie up too much capital, and your rate of return plummets. Just as
you shouldn't become emotionally involved in a trade, you should also
never become tied to ideas. By this I mean becoming so fond of a
particular strategy or trend that you cling to it even after it has
stopped working. You need to have strategies, and to have plans, but you
must also be aware of the shifts and swings of the market, the beginning
and the ends of trends.
When you first form your plan for a trade, you should consider what
price or price range you think the stock is likely to reach. This is
often called a target price, which gives some traders the wrong
impression. A target price is not a price that the stock has to meet. A
stock does not have to do anything. If you treat your target price as a
goal, it can lead to many problems. Your target price should only be
used as a guideline.
The target price helps you figure out your risk to reward ratio, and it
gives you an exit point in your trade. At the least, it should give you
a point where you'll reassess the trade's ability to continue to moving
upward. But your trade may never reach your target price. Many market
factors can interfere with its progress, and you may have set your
target higher than you should have. Since there's no way all your trades
will hit your price targets, it is a good idea to sell half your
position at a more conservative target. Routinely taking profits will
reward you in the long run.
There are a number of things that can interfere with a stock's movement
and force you to close your position sooner than you'd anticipated. Your
stock market lesson plans should cover all of these possibilities, but
here are some reasons that should always prompt you to close a position:
1. The end of a trend. All trends end some time, and you should be
prepared for this.
2. The stock's upward movement has slowed or been abruptly broken,
ending its momentum.
3. The stock is approaching a major psychological barrier, perhaps
reaching 100 dollars or 200 dollars a share, which should have been
anticipated in your plan
4. The stock is about to reach a resistance level it has been unable to
break through before.
This technical barrier should also have been anticipated in your plan.
5. A sudden market wide decline, or the threat of one, or some other
serious uncertainty, which leads to unsafe market conditions.
Exiting a losing trade is not a big deal. Ending a position whether or
not the stock reaches its target price, in accordance with your stock
market lesson plans, is good trading. The best traders would rather lose
a small profit than take an unnecessary risk. You don't have to win on
every trade; no one does, and it's dangerous to try. In fact, by
limiting losses, a good trader can be profitable overall, and make money
on only 40 percent of his trades. Cut your losses and start fresh with
something else when you need to. You'll be happier, and you'll make much
more money.
