Hello trader, people trade or invest stock to raise their money and grow their portfolio up. But most of them fail and lose much money. Then what will they do next? Their will blame the methods. After that they will buy more books and go back to seminars and workshops to find the best way to beat the market, like I said before on my other article.
So what's wrong with that? There is nothing wrong with the methods and there is no perfect system in stock market. Methods are important but not the most important factor that can make you win. Many best investors and traders use different systems but they still make a lot of money. There are just two differences between great trader with "common trader". Great trader has:
The great trader makes a plan before start to buy a stock. They set the buy price, sell price, and a backup plan. They only buy when the price hit their buy target and sell the stock when the price meet their stop loss target. Yes they always sell the stock when the price move against them. When the price go up they will watch the movement, raise the protective stop and probably they will add their position if the stock make a new high (backup plan).
“Cut our losses short, and let our profits run” ---> Great traders' motto
When you keep your loss small and let your profit grow, sooner or later you will get a good return. I will give you this simple but effective example.
A great trader plans that his risk is no more than 2 percent/each trade. He also plans to get 6 percent os profit/each trade. Then he buys:
1. ABC company: 40 shares at $25 ---> $1000
2. DEF company: 40 shares at $25 ---> $1000
3. GHI company: 40 shares at$25 ---> $1000
4. JKL company: 40 shares at $25 ---> $1000
5. MNO company: 40 shares at $25 ---> $1000
Three days later, the markets go against him and he loses 3 out of 5 trades. So he loses $60 [(3 x 40 shares) x (2% x $25)] from his three losing trades and earns $120 [(2 x 40 shares) x (6% x $25)] from his two winning trades. In the end he still earn $60 ($120-$60) although he lost three times.
The great traders admit their mistake and cut their losses short so they have enough cash to make their next good transaction while common traders sit and hope that their losing trade will turn out to be a breakeven or a profitable one.
So you now understand the basic rules to grow your money on stock market. Implement that and you will be a better trader.
My lecturer once said: Knowledge + Experience = Success!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.