Sunday, November 04, 2012

It's Best To Be Flexible

The Chinese has a saying: 随机应变. In English, it means: change with the circumstances, or set your sails accordingly to the direction of the wind.

The world is forever changing; we need to change with it. He who does not change when there is a need to change, is sure to be left behind.

What about a stop-loss you placed in a trade? As with everything, there are exceptions, this is one of them.

A stop-loss is a device you use to limit your loss. A trade without a stop-loss is equivalent to driving a car without brakes.

If your stop-loss is usually triggered, obviously something is wrong. Probably, you are not as good as you think.

After you have bought a stock, the share price moves up fast. It reaches the overbought level. The price is moving ahead of the fundamentals. What is your next move? Average up or take profit?

Different people have different opinions. Some will average up while others will take profit.

Smart traders will use a trailing-stop to lock in their gains. This is how they do it:

When the price moves up to a certain level, they will place a trailing-stop a small percentage below the price. And as the price moves up further, the trailing-stop moves up as well. As soon as the trailing-stop is hit, they will sell. This strategy is to ensure that they do not sell prematurely.

The stop-loss and the trailing stop-loss are devices designed to minimize your losses and maximize your gains. Using them gives you the competitive edge.