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The Importance of a Stop Loss

Written By: Steven Anthonis

When you understand the basic principles of technical analysis, you already have got some knowledge that will help you to trade well. Technical analysis is important, but what’s even more important is something we refer to as money management. In order to trade well, you should have a set of rules that you’re going to follow consistently.

The most important thing that you’re going to have to learn to become a succesful trader, is taking a loss.

If you have the courage to take a loss, you will always have money in your trading account. Simply because you are willing to sell stocks with a small loss, you will be able to make a profit with only 4 good trades out of 10.

Taking a loss is admitting that you were wrong. Traders that keep ignoring the negative signals of the market and refuse to take a loss, might loose a very large part of their trading capital. If a stock is trending lower, a turn north will not happen that easily. But most of the investors don’t like to admit that they’ve made a bad decision and continue to hold the losing stock.

Trading in stocks is speculating and so it’s impossible to be right all the time! Before you step in the trading game, you must understand what you are doing. Let’s compare it with the owner of a shop: buying new products is always a risk, you never know if they are going to sell well. The shop owner will only try new products if his business can afford it, even if he will make several wrong decisions in a row.

Traders in stocks are just like shop owners. We are in the business of trading. As trader must decide how much money he can afford to loose.

Let’s look at the raw figures:
- if you lose 10% on a trade, you must win 11% on the next trade in order to have your capital back;
– if you lose 15%, you must win 18% on the next trade in order to have your capital back;
– if you lose 25%, you must win 33% on the next trade in order to have your capital back;
– if you lose 35%, you must win 55% on the next trade in order to have your capital back;
– if you lose 50%, you must win 100% on the next trade in order to have your capital back;

You can only start to make money if you understand the huge risks that are connected with not taking a loss on time.

About the Author

Steven Anthonis has a website that offers FREE technical analysis of stocks and indices. Visit his website at http://www.stevensupdate.com/indexeng.php

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