Can You Answer this Question?
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On every investment you have, what is your protective stop and what is your profit strategy?
If you are like most investors, you have no plan at all when it comes to your investing strategies. So many people focus all of their work and diligence on making the right investing decisions. They do research, read articles, read annual reports and the prospectus, learn all the nuances of technical analysis, consult their Magic 8 Ball and so on. Probably 100% of the effort outside of making the actual trade comes from the research on what to buy and when.
Yet 100% of the stress of every trade comes from the time you take that trade forward. Not to mention 100% of your profits and 100% of your losses. So, would it make some good sense that instead of putting forth 100% of your efforts on the research of what to buy, that you consider putting forth a 50/50 split between your entry AND your exit strategy?
Do not transact a stock trade… a futures trade… a mutual fund investment… an options trade… unless you specifically know how you are going to take your profits.
A preset profit objective? Using trailing stops? And, even more importantly, what is your initial protective stop and how will you adjust that if the trade starts to break your way?
With your investing strategies in hand, you’ll be surprised how often you actually end up NOT making a certain investment. It forces you to look hard at the risk/reward. It also often shows you how little you really know about what to expect with that specific investment. When you start wavering on the exit strategy, that’s an excellent sign that it is time to move on to another stock pick.
Plus, if you are a long investor only, wouldn’t it have been nice to miss out on 70% of the bear market? With reasonably sound investing strategies, your portfolio probably would have been far greater with even the simplest use of protective stops.
No need to say anymore on this. Because it’s one of the simplest yet least followed of all trading rules:
If you do not have an investing strategy, do not enter. Simple as that.