How to Make Money Through Using A Stop Loss in Stock Investing

By Sam McNeill

A stop loss is a pre-determined price that we use as the trigger to sell out of a losing trade. If the share price falls instead of rising then we sell and we sell at a pre-determined price to ensure that we minimise losses. We need to have a stop loss price because not all trades succeed - some fail. Even the best trading techniques struggle to deliver a success rate of more than 70%. Therefore even using some of the best trading techniques we will still end up with two or three losing trades out of every ten. For these losing trades we must keep our losses really really small.

Every trade can only have one of five possible outcomes:

A large profit.

A small profit.

A small loss.

A small profit.

A large loss.

Five possible outcomes, no more, no less. Every trade that you ever do will result in one of these five outcomes. If you had the choice of eliminating one of these five outcomes, you would certainly choose to eliminate the large loss. Eliminating the large loss only leaves the other four possible outcomes. If our small losses, breakeven trades and small profits even out over a period of time we will only be left with the occasional rather pleasing large profit.

By now you should be in no doubt about the wisdom of eliminating large losses. The Stop Loss is what we use in every trade in order to eliminate any large losses.

We use a Stop Loss Rule with three parts to it:

1. With every single trade that you do you must have a Stop Loss in place.

2. The level at which you set your Stop Loss price is set at the level where your loss will be 2% of total trading capital.

3. When your Stop Loss price is hit then you must sell. No ifs, no buts, no maybes. No waiting one more day/week/month/year until your trade turns into a "long term investment".

For those who may be new to share trading the most difficult part of this rule is part 3. You must sell when your stop loss price is hit. It's the most difficult part of the rule because it brings into play your emotions. Despite the huge emotional drag not to sell - you must sell. When your stop loss price is hit then you sell, no scond guessing. Following this simple and straight forward rule protects your hard earned cash. - 23200

About the Author:

Learn more about share trading education. Stop by the Just Shares site where you can find out all about how to trade shares and what it can do for you.