How to cut losses in stock Market : Many investor selling stocks after a small gain only to watch them head higher, or holding a stock with a small loss, only to see it lose even more.
Taking corrective action before your losses worsen is always a good strategy. In investing, avoiding losses is not always possible, but successful investors accept this and try to minimize their losses rather than avoid them.
Stop Loss Order: Losses can be limited by applying various loss cutting strategies and stop loss is one of them. The stop-loss order prevents emotions from taking over and will limit your losses. Importantly, once the stop loss is in place, do not adjust it as the stock price moves lower. It makes more sense to adjust the stop price when shares are moving higher.
In long term investment before investing in any stock first of all risk/reward ratio should be decided and when we achieve our profit goal we should either take our full profit or book partial profit with cost to cost stop loss order.
Likewise profit target, loss limit also be pre-decided and whenever we hit out loss limit, we should exit from the stock.
How I limit my Losses
Step I - In first step, I set my risk/reward ratio before investment in any stock. Your reward should always be equal to more than your risk. Like 1:2 Ratio is better but one can take 1:1. In percentage it can be 4% or 8%.
Step II - Always strict to ratio and mark a stop loss equal to your risk. For e.g. I set my Loss percentage equal to 4%.
Step III - Whenever my trade goes wrong and i suffer from losses equal to half of my risk ratio E.g. 2%. I ask myself this simple question: "If I did not own this stock, would I buy it today?" If the answer is a resounding "No," then I sold it immediately.
If the answer is yes and still stock fundamental and technical indicator are in bullish side then i add more quantity to average the stock and exit half of the add more quantity at my previous cost with trail stop loss.
Step IV- If still there is loss and stock price reach to my risk percentage than without thinking i exit from the stock and release my capital to invest again in quality stock.
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