Aug 31: Revealed – Million Dollar Stock Investment Mistakes

Anytime that you are making a stock investment, you are going into the Market blind. You donít know what point of the trend you are entering in at. You might be making a stock investment in a stock just before the trend changes. A smart stock investment means you need to protect your trading float and set up a stop loss. This needs to be done before you enter a trade, so that there is no room for error, or last minute indecision. A stop loss is simply a predefined point at which you exit the stock.

Effectively, itís like drawing a line in the sand underneath the share price, saying, ďIf the share price falls below this line, then the stock hasnít done what I thought it was going to do, and Iíll exit the position.Ē

This allows you to protect your stock investment trading plan, because it cuts your losses short, and guards against an all too human tendency to want to believe you must be right.

95% of all stock investments in an entry position means you are expecting to profit from the trade. If, however, the share-investing price goes against you, you might feel the need to justify why you bought the stock by holding onto it until it turns a profit. You might have heard the idea that all big stock investments losses once started as small losses. Well, while the share price continues to go in the wrong direction, those losses grow in lockstep. This is why you need to have a stop loss in place Ė itís like having an ejector seat that tells you when to abort the mission.

One of the most common question Iím asked when traders are introduced to a stop loss is ďHow wide should I set my stop?Ē

In other words, how much room should I give the stock to move? There are no definitive answers to this question because it depends on what time frame youíre making your stock investment in. If youíre a shorter-term stock investment trader, youíre going to have a stop loss thatís set closer to the share price. If youíre a longer-term stock investment trader, youíll give the share price a little bit more room to move and set your stop loss lower.

Once youíve identified what time frame youíre looking at trading, you need to be able to remove the normal market noise (volatility) in that particular time frame. You donít want to have to close out of a stock investment position just because a share price moved a little bit due to its normal trading volatility.

In fact, there are some serious drawbacks to setting tight stops.

First, youíll decrease the reliability of your system because you get stopped out more often.

Second, and probably a little bit more importantly, you dramatically increase your transaction costs, because youíre trading transaction costs make up a major proportion of your business expenses.

To give yourself a fighting chance, you want to trade a system that doesnít chew through excessive brokerage fees. This is one of the major reasons I steer my clients into developing a trading system that runs over a slightly longer time frame. With the correct system in place, and your stock investment risk minimized, you are well positioned to maximize your trading profits.

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David Jenyns is recognized as the leading expert when it
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