Hello All,
I know that I seem to be harping on exits lately BUT I have some very good reasons.... First of all, I read many post requesting information about exits. There are many out there who do not understand what we are talking about when we talk about exits. I fully understand as the term exits is very general and we seem to throw a lot of "stuff" under it without explaining what we are talking about... Another reason, and my most primary, is the great importance of exits.. YOU CAN NOT MAKE MONEY IN THE MARKET WITHOUT GOOD EXIT STRATEGIES!!!! We seem to spend all of our time on the entries when it's the exits that will make or break us... Let me explain what I'm talking about.
I am always saying that you must first decide what type of trader you want to be before you can trade. This is very true BUT many time taken to mean that we must develop a buying strategy to suit out style. That will only set you up for a fall... It's the exit strategy that determines the type of trader you are, not the buying strategy.
Let's say you buy three stocks and you are looking to trade short term. We will define short term as one to four weeks. All three stocks were bought at 100 shares @ $20. Stock1 is a strong mover and you get a nice little run up to $22... Not bad... You are really feeling like a winner so you go out and buy two more using the same system 100 shares @ $20. Unfortinatly stocks two and three are not in the same frame of mind and decide to go in the other direction. They are going down and are now sitting at $18. The two new stocks you bought can't seem to agree on a direction so they do what most of us do, they go in different directions. Stock 4 goes up to $23 and stock 5 goes down to $18. You are really trying to do what's right so you set your loss limits at 10%. Let's review where we are.. All of our stocks are sitting at 10%. Two have gone up 10% and three have gone down 10%. Unfortunitly for you, that translates into a 2% or $200 loss... Will the three stocks that are down 10% turn around and find a better direction??? Maybe BUT remember we are short term traders so we MUST cut our losses... We move on with out $200 loss thinking that we are BAD traders and wondering if the local cab company needs any help......
There could be another senerio!!!! Let's say that we limit out losses to 5%. If that were the case we would have sold our three lossing stocks when they hit $19 and we would be sitting with a $100 PROFIT.... Now we could ride in the local cab instead of driving it!!!!! I realize that this may be a superfishal example BUT it should help to drive the point home.... Two out of five should be enough to make you a winner if you have the propper stratigy... Short term traders MUST cut their losses quickly or they will lose in the long run. If you are looking to hold your stocks longer term you can afford to go down to 10% BUT if you are looking for fast turn around, get out early.....
Setting 10% Limits:
stock1 22 100 20 $ 2,000.00 $200.00 10.00%
stock2 18 100 20 $ 2,000.00 ($200.00) -10.00%
stock3 18 100 20 $ 2,000.00 ($200.00) -10.00%
stock4 22 100 20 $ 2,000.00 $200.00 10.00%
stock5 18 100 20 $ 2,000.00 ($200.00) -10.00%
$10,000.00 ($200.00) -2.00%
Setting 5% Limits:
stock1 22 100 20 $ 2,000.00 $200.00 10.00%
stock2 19 100 20 $ 2,000.00 ($100.00) -5.00%
stock3 19 100 20 $ 2,000.00 ($100.00) -5.00%
stock4 22 100 20 $ 2,000.00 $200.00 10.00%
stock5 19 100 20 $ 2,000.00 ($100.00) -5.00%
$10,000.00 $100.00 1.00%
Dave Evans |
