Stock market commentary, analysis, insight and opinion of the RightLine Editors is available every Tuesday/Thursday evening & Saturday
afternoon. The following is excerpted from the:
August 17, 2017 - The RightLine Report
Notes From The Editor
Raise your hand if you've been here before. A trade is entered, the stock moves against you, and soon you're holding a losing position. Gradually the losses mount until you're facing an unwelcome decision: bail out for an unacceptably large loss, or hold on in the hopes that the stock will somehow bounce back.
While major losing positions can reverse course and turn into winners, odds of that happening are relatively low. But for many traders, there's always that temptation to keep holding on as the stock plumbs the depths of painful losses. If you do this enough times - or even once, if you take a large position - your account could face massive damage.
This is one of the reasons we constantly preach the value of risk management. While it's natural for hope to creep into your mental framework as a trade slips deeper into the red, that raw emotion can also cloud your better judgment. When it comes to managing potential losses, there's no room for inconsistency; you need to be machine-like in your efforts to limit risk.
Setting a reasonable stop-loss before you enter the trade will all but guarantee that you never face an unacceptable loss. (The only exception here is the rare case in which a stock gaps above or below your stop). What is "reasonable"? That depends partially on the stock's recent volatility and key support/resistance levels. But the most important factor is your own personal risk tolerance.
Ask yourself honestly: do you have the self-discipline to exit a position when it hits your maximum-pain level? If not, it's crucial that you place a "hard-stop" with your broker. This will take you out of the position, even if you aren't watching the market. By the same token, hard stops make it possible to swing trade when you're occupied during the trading day.
Position sizing is the other key element of limiting your risk. Combined with a steadfast adherence to honoring your stops, you can ensure that losing positions - an inevitable fact of life for any trader - will always be manageable, and never take an inordinate chunk out of your account.
For a step-by-step guide to controlling risk, click over to www.rightline.net/education/riskcontrol.html.
You can also find a handy risk calculator at www.rightline.net/rcc/index.html.
Here's to profits,
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