Losses are inevitable, but losing trades become a nightmare if losses become too big. So, speculate the right way by keeping losses small, so you always have the chance to recover and come back. Don’t let them wipe you out.
Make the 3 right steps to protect your portfolio from too big looses:
Use (Trailing) stops
The worst thing that can happen to you is when emotions control your decision making. Setting stops provides you with an exit strategy. It ensures your emotions don’t take over and destroy your portfolio. Trailing stops will also allow you to let profits run and don’t let a winner become a loser again.
Know why you entered the trade
Traders have all kinds of strategies for entering a trade. But if things change, it’s time to exit. If you entered a trade because a technical indicator suggested the stock was going higher and instead it falls, you need to get out. Don’t hang around and hope things will change in your favour. This is not the reason why you entered the trade. If your initial reasons aren’t working, exit the position.
Don’t allocate too much capital to any one position.
Don’t put too much money into a trade. Don’t ever put more than 5% of your capital in just one trade. If you get stopped out with a 20% or 25% loss, you’ve lost only 1% – 1.25% of your capital. This is an amount you can easily cover or win back with your overall, well diversified portfolio.
It is simple to take the right steps to protect your portfolio.
Sven Franssen