Tag: how to avoid losses

  • How to Cut Losses in Trading Stocks?

    How to Cut Losses in Trading Stocks?

    How to Cut Losses in Trading Stocks?
    The first and most important lesson in trading stocks is damage control. One of the methods is by cutting losses.

    By Guy Avtalyon

    This is the essence of trading – how to cut losses immediately. You have to learn this because it is something commonly named as damage control. And if you are not ready for the worst-case scenario and you get panicked, your losses in trading stocks can be enormous. One single bad move can destroy your trading account. 

    Not all trades will be winning, so you have to know how to cut losses in trading stocks.
    First and principal, you’ll need a good trading plan. The best plan is to exit a losing position and cut losses when the trade doesn’t match your plan. So, the trading plan is mandatory.

    Every single trader in the world has had or still has losing trades. That isn’t a problem. The main problem is how to cut losses and have control of your trades. You are the one who makes decisions and we are pretty sure you wouldn’t like to have a great loss. There are some methods that will give you a chance to reduce the losses. And here is how to cut losses in trading stocks.

    How to cut losses in trading

    Learn from the kids. When they just start walking it is normal to fall but every single time they will get up and continue walking. The same is with trading stocks. Every trader at some point will experience losses but the true wisdom is how each of them controls the damage. Damage control means cutting losses quickly without hesitation and quickly. So how to cut losses in trading stocks quickly? 

    There is some unique rule: when your stock falls for 7% – 8% it’s time to exit the trade. If it is so simple why would we spend so many words to explain how to cut losses? 

    Well, it isn’t that simple. When you have a losing trade and exit after your stock drops for a significant amount, you’ll have to compensate for that somehow, you’ll have to reclaim your loss. There is some math behind losses. 

    For example, let’s say you bought a stock at $100 and after several days its price dropped 7% to $93. What you have to do? You’ll exit the position, of course, and enter the other trade to recover from the loss. But where is the math? Here. You lost $7 on a single trade, right? And now you’ll need to profit more than it is the case if you didn’t have that loss. Your available capital is $93 now and your gain has to be 8% on that capital invested to cover the previous loss. It isn’t so hard you might think. Yes, your profit is actually zero now.

    What will happen if you hold that stock?

    Let’s say you are pretty sure that your stock will bounce back and it will be worth $150. And you are brave enough to enter the next trade. But the stock market is cruel, it doesn’t take care of your wishes and says you have to think, to make calculations and not to make wishes. What if your stock drops at $50 which is possible. 

    The math behind says you’ll need a 100% gain to cover your loss. That is a bit harder than to reclaim 7%. And, be honest, how many stocks, that can double their price, you own? So it isn’t a smart decision to hold a stock further if it has a 7% or 8% decline. A smart decision is to close the trade with reduced loss and find the new winner.

    The logical move is to cut losses quickly

    The understanding of how to cut losses in trading stocks will help you to protect your overall portfolio. Put your emotions aside, you might love that stock, adore the company but you have to admit that holding a losing stock is dangerous. No, you didn’t buy that stock at the wrong time or you have bad luck, your losses come from your behavior. Your small mistakes turned into a big failure. 

    When trading stocks or any other asset, the main goal is to profit. So, why would you like to hold a loser? 

    If you avoid selling such a stock you are avoiding blame, right? You have to understand that every single human makes mistakes and bad choices. All the time. So, what? It isn’t a problem. The true problem is when you don’t want to admit yourselves you are making mistakes and they cost you a lot. 

    Why would you stay to hold such a losing position? 

    Maybe you hope your stock will bounce back to the buying price and sell it? That isn’t going to happen. Well, it will happen one day in the future but your losses will be bigger and bigger. Nothing will help you to “delete” this mistake. Why? What had a tendency to fall, will continue to fall. In most cases.

    That’s why it is very important to understand how to cut losses in trading stocks.

    If the pattern doesn’t work, exit your position

    It is possible for a pattern to turn against you. There is no other way than to take a loss. Don’t hesitate to exit the position. You don’t need to wait for your trade to become a loss. Even a small gain is better than a small loss. Frankly, small gains are what beat markets every day. Many experts will advise you to get out of the trade with a small gain in case your pattern is working against you. If your stock doesn’t do what you expected and planned, just cut it. In this way, you’ll stay in control of your trades. 

    For example, you bought some high-tech stock in a high spike of your interest. Let’s say it is a new company with a great prospect, with a new product, everything is excellent. In theory, such a stock should skyrocket immediately. Excellent pattern, you may think. But what if the stock misses rising? What if you expected the price could rise up 30% and it hit 25% and suddenly stopped rising? Will you wait for it to fulfill your expectations? If you’re smart enough you’ll get out.  

    Why are we so resolute about this? 

    We assume you have a trading plan before you enter the trade and you shouldn’t care if you could make $1 or $100 if your pattern is working against you. It has to work what you require. Otherwise, get out because you don’t have control of your trade. That is how to cut losses in trading stocks by following your trading plan. If you do that you’ll don’t need to wait for the trade to become a loss. You’ll be able to exit exactly on time and cut potential losses.

    A few ways of how to cut losses in trading stocks

    First of all, you must have a trading strategy. That means you must have all rules on-hand, no matter if you want to buy or sell the stock.
    Further, you must know why you are buying a particular stock, but also, it is mandatory to know why you are selling it. You have to have a criterion. So, set rules for each situation.
    The most important action in trading is to set stop-loss orders. And here is one suggestion, be smart and never adjust stop-loss order when the stock price is dropping, do it when it is growing.
    Analyze your portfolio on a daily basis. Consider why you are still holding some stocks. If you can’t find any reason, sell it, sell them more.

    Controllers when trading stocks 

    Even before entering the position, you’ll have to know how to control your emotions. This is extremely important when you are faced with losing trades and have to cover losses. Always keep in mind that losses are part of trading stocks and learn how to handle your emotions when the bad time comes. For that to achieve, you have to be prepared for every trade with understanding that you may have losses. You are expecting them. That will help you to defeat your emotions. During this long run, you’ll have failures, successes, difficulties, and you have to know how to handle them.

    Further, invest only the amount you can afford to lose. In short, always protect your capital. If the stock price runs against you, cut it. It is better to exit the position than to suffer a bigger loss. Limit the risks. For each trade, you must estimate the risk/reward ratio.

    If your trade goes exceeding the risk you planned, cut it, cut the potential losses. And do it quickly, especially if the stock price reaches your stops. Just don’t hold the position and follow your plan. Never think you can wait a bit more. In a few seconds, your small loss could easily turn into huge losses. Give yourself the space to come back to the game.

    Successful traders aren’t unreasonable and think ahead. By doing so they are prepared to adjust their position size if necessary.

    In trading, it isn’t always possible to avoid losses. Honestly, it is almost impossible. But you can reduce them only if you learn how to cut losses in trading stocks. There is nothing wrong with selling a stock at a loss but do it on time to minimize it. When you cut losses with a clear head you’ll be ready to return to the market. Yes, we know, it’s hard to have a sharp mind when you are faced with the potential loss of thousands of dollars. Just follow your trading plan, stay with it, and follow the basic rules of trading. Nothing more, nothing less. The market always recovers. You will too.

  • Traps of Buy and Hold Strategy In Investing

    Traps of Buy and Hold Strategy In Investing

    Traps of Buy and Hold Strategy In Investing
    In the long run, buy and hold strategy is less costly than other more active strategies but has some traps also.

    Some may ask how are possible traps of buy and hold strategy? So many investors have this approach in investing and see this strategy as the best and safest one. But recently, due to the coronavirus pandemic that caused, and still has influence, on the stock markets over the globe, as well as on the overall economy, we can hear different sounds. Lately, some investors propose some other strategies and marked some traps of buy and hold strategy in investing. 

    News of the end of the “buy and hold” strategy in investing was blooming. But, those sounds are also greatly magnified. Saying that this strategy isn’t able to survive the last market downturn is nonsense, at least. The truth is that this strategy is able to survive any market condition. This pandemic environment cannot decrease the importance of this strategy. 

    But is the buy and hold strategy perfect, is it possible that it has some traps, downfalls, pitfalls? That is exactly what we would like to point out. Also, it is important to notice that the majority of traps of buy and hold strategy are developed from investors’ behavior. They became more worried about their investments, which is normal in the situation when we have had a great market decline. But this strategy is still relevant and it will be despite some traps it has.

    Traps of Buy and Hold Strategy

    Trap 1: Buy and Forget 

    This is the first of many traps of buy and hold strategy in investing.

    Managing your portfolio is a must. Long-term investing doesn’t mean that you can neglect the importance of developments and adjustments, if necessary, in your portfolio. We all know that famous Buffet likes to keep the investment for a long time, but do you think he never looks at his portfolio? It’s 100% opposite. He, and many other investors who do care about capital invested, are fully informed of each of their holdings. So, as you can see, one of the traps of buy and hold strategy is the approach to this investing expressed in the mantra “buy and forget”. 

    You simply have to keep your eyes on your portfolio. It is very important to check if the company you bought is really the right one. Times are changing, management is changing, the trend is changing, and since literally everything and anything may affect your holdings, it is smart to stay fully tuned on your investment. 

    For example, let’s say you bought the shares of stock in some company that looked pretty good but suddenly you reveal that it wasn’t such a good pick. What are you going to do? Will you keep holding that stock? Why not, your strategy was the buy and hold? See how you can jump into the trap very easily? If you bought the wrong company even at a low price, the buy and hold strategy is a stupid move. 

    What if you were smart and purchased the right company but the price was wrong? Do you still think you did a good job? Of course not. So, you should never even try the buy and forget strategy because it is a losing strategy. And also, one of the traps of the buy and hold strategy.

    Trap 2: The simplicity of buy what you know

    It is a nice mantra, seducing like a poem, but that level of simplicity can be very dangerous. Why is simplicity one of the traps of buy and hold strategy in investing? To make this clear, do you hold stocks of the company whose products you use in everyday life? Yes? Look, there is nothing wrong, you can like the company’s product because of its quality, design, smell, whatever. However, it is unreasonable as a criterion when it comes to picking the stock for long-term investing. The meaning of buy what you know is something else. You don’t need to buy Disney’s coats or sleepwear if you want to buy the shares of the company. 

    Investing is a very serious job, so when you choose stocks some other things you’ll need to know before buying them. For example, what is the company’s prospect, how the company is positioned among competitors, is the stock fair valued, etc. 

    Some studies unveiled that inexperienced investors have a disabled blind spot when they estimate what they know and what not in the sense of picking the stocks. Remember, stocks are not your lover. You don’t need to love them. Keep that love in your private life. But when you estimate and evaluate the stocks you’ll need your rational mind. Free of feelings and emotions. It’s simple. When you are choosing the stocks where you’re gonna put your hard-earned money, the emotions are a burden and could lead you to the wrong and harmful decisions.

    Trap 3: Stay to your investment plan

    Of course, it is a good decision and you have to do that but not always. We said that numerous times: Stick to your plan! Yes, but only if you hold well-evaluated stocks in your portfolio. If you have a portfolio filled with stocks you “love” and you picked them randomly, you’ll have to change your plan and your portfolio. What else can you do? Nothing. You can do nothing with wrongly chosen stocks. Why would you like to hold stocks with poor performances? And there is a great chance that you picked losers if you didn’t build your portfolio based on investment outlook. So, how to stay with your plan if you have losers? The only reasonable action is to improve your investment portfolio. You have to change your holdings, and you’ll need to be more realistic when picking the stock. 

    Don’t be afraid! You don’t need a detailed and exact outlook for growth in the next year. But you surely need to have a basic understanding of the economy and the market.

    For example, the whole world has an economic downturn today. The fears of many companies regarding solvency are rising. But this situation is likely not to continue. Actually, we are 100 percent sure it will not. The economy will bounce back soon or later, there is no doubt. And you as an investor also have to know that. 

    To put it simply, if you have a long investment horizon, why should you be worried if prompt recovery or a slow recovery will come. Your only concern should be your ability to be clever enough and to be prepared to adjust your position if your investment outlook has to change.

    If you stick to your investment plan and you do not manage your investments with due diligence, you’ll be faced with traps of buy and hold strategy in investing. 

    Trap 4: The money is locked

    Despite the fact that it looks like a great strategy, the “buy and hold” strategy has some traps and drawbacks. First of all, this strategy means investing for the long run, so your money invested will be locked in stocks. During the holdings period, it might happen that you’ll have to stay away from other investment opportunities. It will be hard for all of the investors to have such discipline, particularly if they made bad purchasing and choose lagging stocks. Especially today when many investors realize that their choice wasn’t that good.

    Trap 5: Time is my friend

    Well, it can be true especially if we count on compounding. But just because you owned the stock for 15 years, does not mean that you are qualified for a generous reward for your capital invested. Just look at the differences in return between your stocks. If your portfolio includes a few great investments, over time it can be dragged down by the losers. Of course, what or who can stop you from holding all losers in your portfolio. That’s your choice. But think about diversification or buying some index funds. We hope you understand that time isn’t always your friend and that your investments may drop over time. There are no guarantees unless you keep your eye on your investing, manage your portfolio, adjust it is necessary, or engage some to handle it. But yet, nothing is 100 percent sure when it comes to long-term investing. You should count on it. And try to avoid traps of buy and hold strategy because it has them many.

    Trap 6: My best players will always beat the market

    Really? What if the market crashes? Despite the fact that the markets will survive even an Armageddon, the market crashes can lessen the value of your investment significantly. For example, if a prolonged bear market occurs, investors stick to the buy and hold strategy and can lose all gains. Yes, your winners are solid stocks and they may bounce back, but if you own the stocks that are notably going down, your portfolio will be hurt a lot. That kind of stock could wipe out your portfolio. Think about the oil sector today. What do you think, will it be better? Of course, but the damage is done.

    If you prefer the buy and hold strategy it doesn’t mean that you’ll never need a risk management strategy in place. Every single investor or trader must know when to pull the plug and avoid bigger losses. 

    Bottom line

    Buy and hold strategy in investing is one of the most popular ways to invest in the stock market. In most cases, investors who practice this strategy have no worries. But, if we say it has no drawbacks we’ll lie. Moreover, this strategy has some serious traps and failures. If you pay enough attention to your portfolio it is possible to avoid them. That will require your time and money to secure your investment against market crashes. Also, you have to know how and when to cut your losses and take profits.

  • The Bear Market Starts – How To Avoid Big Losses?

    The Bear Market Starts – How To Avoid Big Losses?

    The Bear Market Starts - How To Avoid Big Losses?
    We are not clairvoyants so we cannot predict how long this bear market will last, but what we can do is to suggest to you how to overcome this market condition. 

    The bear market starts. Dow Jones closed down over 20% on March 11 compared to its highs in February. That is the end of its historic bull market run. The bear market starts. Actually, it started at the moment as the pandemic was declared by the WHO. What to do with your investments right now? Will the stock market crash?

    No one knows for sure what will happen next. But it is quite possible that the coronavirus could put stocks down for a long time. What makes us afraid is that the bear markets can go along with the recession.

    Investors are panicked. Past several weeks the stock market was switching so fast and unpredictable. Michael Macke, founder of Petros Advisory Services told CNBC Make IT about investors’ feelings: “like we are all Chicken Little.” His comment was relating to the tale about the chicken who was claiming the sky was falling, but the chicken was wrong, right or wrong?  “Only after the fact will we know for sure if we have a bear market or even a recession,” said Macke.

    Nothing can last forever, even bad or good. The good times must come to the end at some point. This is particularly true for the stock market. And this bullish period did it. So, the bear market starts.
    After a fairly exciting run, the stock market lastly jumped into the bear market territory. Investors are disturbed and panicked. 

    But what do we know about the bear market? 

    What to do when the bear market starts

    The bear market is a point when stock prices drop at least 20% from a recent high. They will stay down there for a while. But how long will it take for the stock market to recover? What to do? Will the recession come too? What to do with investments? How to avoid losses and is that possible at all? This is a turbulent time. So many questions but several answers.

    If we try timing the market we’ll be foolish. So, let’s see what experts have to say. First of all, they say drops like this one is a good opportunity to buy more stocks, particularly the people investing for retirement. This is important for younger investors who couldn’t buy stocks during the bullish market because the prices were too high, hitting all the time the new highs. If you have some spare money and you don’t need it in the next, for example, five years, put it in investments. But if you think you will need that cash it is smarter to stay away from the stock market. The history of the 200-years old stock market shows that the market will start to rebound as the bad news stops coming and the prices will stop to decline. 

    What is smart to do during the bear market period?

    When the bear market starts, it is smart to check your concrete investment strategy. If you are a young investor it is quite possible you are facing the bear market for the first time in your life. So, this is a great opportunity to check your risk appetite and how much you are able to manage it. You might obtain a valuable lesson.

    Even advanced investors do the same. They are reviewing their portfolios to be sure that the investments they are holding are suitable for their investing goals. It is very important to see your investments are in line with the risks you take. Some experts think that pilling off into safer investments is a bad decision. And maybe they are right. History shows that if you successfully handle your stocks during the bear market, it is more possible to profit a great when the market recovers. Yes, this all about long-term investors because investing isn’t about a moment in time, it is a process over time.

    What is the best strategy when the bear market starts?

    No one likes this. This enemy is dangerous so don’t try to fight back with it. The most important is to stay calm. Okay, you may play dead as you should do when you meet the bear in the woods. Just lay down and pretend you are dead. This was a joke but it works when the bear market starts and everything seem so uncertain.
    So, don’t be frightened. Fear is a bad partner now.

    Do you know the old saying on Wall Street? “The Dow climbs a wall of worry.” What does it mean? This means the markets will continue to rise despite anything. Nothing can stop that. No matter if we have an economic crisis, terrorism, or other misfortunes. Just keep your emotions under control and far away from investment decisions. Look, today’s catastrophe will be just an unpleasant flash one day. Nothing more. Well, it can last a few years but still.

    It is a normal condition

    The other important thing. It is normal to have bad years in the stock market. They are coming in the cycles and it isn’t unusual. For long-term investors, this is particularly a favorable situation. They can buy stocks at discount. 

    Speaking about this bear period, it might be smart investing in, for example, NFLX (Netflix) can be a good choice. Due to the coronavirus outbreak, and pandemic people have to stay at their homes and what are they going to do?  Watching TV, of course. That will bring a higher income with more subscribers, consequently, the dividends could be higher and the stock price will rise. But don’t buy Uber’s stock, for instance. You might wonder why. It is quite simple to explain. As more people will stay at home, less income will be for Uber and prices can drop. (Thank you Guy, for these examples.)

    Maybe the stocks of the companies that are involved in vaccine development or anything related to this unfortunate situation are not bad decisions. Pharmaceutical, detergent, soaps, antiseptic, hygienic supplies producers, virus testing, and other biotech companies. Think about this.

    Diversification can help also

    The point is to have a well-diversified portfolio. If you don’t have yet, it is time to add bonds, cash, stocks. The percentage of each will depend on your risk tolerance, goals or are you an investor with a long time horizon or not. A proper allocation strategy will save you from potential negative forces. 

    Further, invest only the amount you can allow to lose, that will not hurt your budget or the whole capital. For example, don’t take short-term loans and buy stock with that money if you don’t plan to hold them for a long time, e.g. five years or longer.
    Keep in mind, when the bear market starts, even trivial corrections, can be remarkably harmful.

    But as we said, when the bear market starts that may provide great opportunities if you know where to look for. We pointed to just a few examples above. Maybe you should follow what Warren Buffett did. So, buy the value stocks since their prices are going down.

    Bottom line

    What to do when a bear market starts?

    We can’t predict how long this bear market will last. If you’re considering selling off a group of stocks to lower your losses, just don’t do that. By doing so you’ll end up locked in losses. How can that situation help you? But if you have cash available for investing, this bear market period is a great time to do so. Remember, just don’t invest money you may need in the next five years or more.

    Also, don’t get scared as some investors are when a bear market starts. The stock market will recover from this as always it did during history. If you buy stocks now and your plan is to hold for a long time, you will have good chances to end up in profit.

    Maybe it is best to use our preferred trading platform virtual trading system and check the two formula pattern.