Limiting Losses in the Stock Market

It is amazing that everyone talks about getting the huge returns in the market, but not many people focus on protecting yourself from taking huge losses which is the most important part of trading.

Think about it if you buy a stock at $30 and it falls and crashes to $10 you have just lost 66% of your account. Ok I know that everyone says to be diversified, so you probably will not put all of your account into 1 stock.

But what about bears markets where you get a diversified portfolio and they all go down. That can hurt you very much, and possible be the end of your stock market career.

So what can you do about it? Well you can cut your losses short. If you bought the $30 stock expecting it to go up and put a stop around $27 you would limit your loss. It isn’t exactly following the buy low sell high philosophy, but is much better than buying the stock for $30 watch it crash and wait 20 years hoping you will break even.

The great thing about cutting your losses short is that you can take that money and put it into something else instead of having it tied up into 1 position for years. This allows you to get more out of your capital and make a higher return then someone who is just holding onto the stock hoping that one day they will be profitable.

Another advantage is that the less you lose when you are wrong the less often you will have to be right to be profitable. Now does not give you permission to go out and buy crappy stocks with crappy technicals. You still need to do your research, but it is a lot easier to make money when you only have to be right 40% or 50% of the time to do it.

For more on limiting your losses visit http://www.stocks-simplified.com/Chart_patterns_that_fail.html

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