Before you embark upon a journey of trading stocks or futures contract, and prior to making any transactions, you MUST determine and establish your risk level. Dealers that fail to do this are often doomed from the beginning. The simple fact is that almost all trading accounts which go bust are due to the failure to ascertain at what stage the dealer will cut their losses and move on to another trade. Rookie traders are especially likely to do this. They hang on to losing positions hoping they will turn around – just to watch the price drop even farther. Too much thought and effort are expended on the purchasing decision rather than the selling decision. The sad reality is that it is the selling decision that will determine your destiny as a successful trader. And successful trading is determined by how long and how well you can protect your accounts against loss until the major profit comes your way. Placing a risk level for your account and to your transactions will offer such protection.
If you are like everyone else, you have an internet trading account and you are free to move in and out of places without the input or disturbance of a broker. If you are not doing so, we advise that you do. So once you purchase a position, have you decided where you would like to sell it if the cost would fall? Many traders only think of the price going up – they never consider what they will do if it goes down. You have to determine this limitation BEFORE placing a trade.
We recommend that get from this place in case it drops anywhere from 7% to 10% from where you bought the stock, option or product (or another market derivative). Yes, it might rebound and take off 100 points once you purchase, but it might also drop 100 points and your account could be wiped out. Consider this, if your account drops 50%, then you want a 100% gain to return where you were! This is the reason you MUST set a stop-loss after each trade you put with your agent. Do this without fail IMMEDIATELY after putting a trade with your online broker. As soon as you’ve put a stop-loss degree with your online broker, the machine will automatically sell your position when that amount is attained. Bear in mind, stay in the game till you reach that big trade!