{"id":26678,"date":"2012-01-17T23:34:30","date_gmt":"2012-01-18T04:34:30","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2012\/01\/17\/the-lesson-you-must-learn-as-a-stock-trader\/"},"modified":"2012-01-17T23:34:30","modified_gmt":"2012-01-18T04:34:30","slug":"the-lesson-you-must-learn-as-a-stock-trader","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2012\/01\/17\/the-lesson-you-must-learn-as-a-stock-trader\/","title":{"rendered":"The Lesson You Must Learn as a Stock Trader"},"content":{"rendered":"

By MoneyMorning.com.au<\/strong><\/p>\n

How often do you reckon a successful stock trader<\/strong> gets it right? 60%, 70%, 80% of the time? <\/p>\n

Not a chance!<\/p>\n

Most stock market traders don’t get anything near that sort of hit rate. At least not the stock traders I talk to. Many of the best traders have a hit rate of well under 50%. Sometimes as low as 20%! <\/p>\n

But they still make money overall.<\/p>\n

<\/span><\/p>\n

This all comes down to what’s probably the most important lesson you can learn as a stock market trader<\/a>. That is: maximise your winners and minimise your losers.<\/p>\n

Even if you don’t consider yourself a stock trader, keep reading. This is for long-term investors<\/a>, too. In my experience, many stock market trading concepts can be incredibly useful for your long-term investment approach. Especially this one…<\/p>\n

Imagine you’re learning to ski. You’re descending nervously down the slope when things start to go wrong. You’re building up speed and you’re going too fast to put in a turn. That’s when most sensible novices sit down – a self-induced fall you might call it. If not, you end up gathering pace and setting yourself up for an almighty wipe-out.<\/p>\n

That’s kind of what I’m talking about here. When your losses start to gather pace, you need to get out of the trade. A calculated crash – and minimised loss – means you can get up and have another go.<\/p>\n

In terms of stock market trading, what we’re talking about is setting relatively tight stop-losses. A stop-loss is basically an instruction with your stockbroker to quit your trade if it hits a predetermined level. It quite literally ‘stops’ your loss from escalating. <\/p>\n

My colleague John C Burford often refers to his 3% rule. Never put more than 3% of your cash at risk with any one stock market trade. Work out where that loss is and place your stop there. <\/p>\n

The only thing I’d add is that your stop should also relate to the stock’s volatility and trading range. <\/p>\n

Now clearly such a tight wealth preservation strategy could trigger a lot of stop-losses. As a successful stock trader<\/a>, you’re going to have to accept not just the occasional loss, but a lot of them. <\/p>\n

That’s why most investors don’t make for good traders. Most can’t accept that in this game you never progress further than the ‘novice’ level. The most common shortcoming for a stock trader is that he thinks he’s an expert. He’s not going to sit down before he falls down – and he sets himself up for a serious wipe-out.<\/p>\n

But of course you’re never going to get rich by just cashing in losses…<\/p>\n

<\/p>\n

Why it’s important to let your winners run<\/div>\n

<\/strong><\/p>\n

To make up for your losing stock trades, you’re going to have to make sure you squeeze some serious profits out of your winners. This is tougher than it sounds. <\/p>\n

With a stock moving up, emotions run high. There’s a very real danger of getting trigger happy… glued to your monitor, with your hand on the mouse, it’s all too easy to snatch a quick profit. “You’ll never go broke cashing in a profit” is dangerous advice. <\/p>\n

What you want to do is make the most of the momentum. Ride your winning trades until you’re confident the trend has reached the end. A trailing stop-loss could be great way of doing that. You keep moving your stop-loss up as the price goes up, selling once the stock drops a certain amount below its high.<\/p>\n

The point is, minimise your losses and let your winners run. <\/p>\n

Bengt Saelensminde
\nContributing Editor, Money Morning (UK)<\/em><\/strong><\/p>\n

Publisher’s Note:<\/em> This is an edited version of an article that first appeared in Money Morning (UK)<\/a><\/em>. <\/p>\n

Minimising losses and letting the winners run is part of what makes Murray Dawes a successful trader. Remember to check out Murray’s latest free stock market update<\/a> video on YouTube by clicking this stock market update<\/a> link.<\/p>\n

From the Archives…<\/em><\/strong><\/p>\n

Why Fallen Commodity Prices Mean This Sector is Worth a Punt<\/a>
\n2012-01-13 – Kris Sayce<\/p>\n

Why Australian Banks Are a “Suckers” Investment You Should Avoid<\/a>
\n2012-01-12 – Greg Canavan<\/p>\n

The Fed’s Funny Money Merry Go Round<\/a>
\n2012-01-11 – Kris Sayce<\/p>\n

Silver Price Ready to Explode<\/a>
\n2012-01-10 – Dr. Alex Cowie<\/p>\n

Will the Gold Bull Keep Running in 2012?<\/a>
\n2012-01-09 – Dr. Alex Cowie<\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n


\nThe Lesson You Must Learn as a Stock Trader <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au How often do you reckon a successful stock trader gets it right? 60%, 70%, 80% of the time? Not a chance! Most stock market traders don’t get anything near that sort of hit rate. At least not the stock traders I talk to. Many of the best traders have a hit rate of … <\/p>\n

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