No one has a crystal ball when they trade on the stock market. Stock prices can go up as well as down. What you need is an exit strategy that will help you survive the bad stocks and make a good profit on the good ones.
A trailing stop loss is the method that has worked best for me. I'll briefly explain what a stop loss is for those who don't know. Stop-loss orders tell your stock broker to sell your shares if the price falls to a certain level.
This can be done in two ways. The easiest way is to decide how much of your investment you are willing to lose as a percentage. A good rule of thumb is to not go below 10 percent. Find out how much the stock is worth at this point and make that your stop loss. As the stock price goes up, keep moving the stop up to keep the percentage difference the same. Some brokers offer a service called "trailing stop loss." You tell them what percentage you want the loss to be, and they do it for you.
The second method is a little more complicated. It comes from the book "How I Made $2,000,000 in the Stock Market" by Nicholas Darvas. The markets usually move in waves. A stock that is going up will reach its highest point and then go back down. At each stage, it may do this more than once. The idea is to look at the stock's chart and set the stop loss just below where the dips are the lowest. Nicolas also suggests that when the stock breaks out of the sideways trend, you should buy more of it, and when it starts moving sideways again, you should move the stop loss up to just below the lowest part of the dip.
Using the stop loss as a way to get out of a trade only works if you don't change it because you think the price will go back up in a few days. Some of the time, you'll be right, but most of the time, the price will keep going against you, causing you to lose even more money. As a result, the money that is still in the first stock that is falling can't be used to buy something else.
Lastly, a word of caution about using the stop loss system to protect your capital. There are rules about how much a price can drop in one day. There are times when prices fall quickly on the market. If it falls this far, your stop loss may not work, and you may not be able to sell. Even though these things don't happen very often, you should know about them. So that they don't surprise you when they do happen.
