On Monday 5-11-07, my streamyx is down and I had to go to a nearby A.A.Anthony Securities Branch to trade. At that time, there's is an old uncle ( 50-55+ ) sitting next to me. We had a nice conversation and he told me he's out of job and had to try his luck at the stock market to earn some meal money....
Uncle: Why is the market so bad? ( Asian stock markets all badly hurt on 5th Nov 07 )
Me: Market bad, you take any loss, uncle?
Uncle: Yap, I had 5,000 shares of Dataprep and its due tomorrow. (at that morning, Dataprep is still trading at 0.72)
Me: What price did you bought?
Uncle: 0.76
Me: Dataprep is pretty weak based on the charts, its best for you to have a stop loss on it.
Uncle: I know, I plan to lose RM 200 on it.
Me: You are already losing RM 200 at this 0.72 price.
Uncle: I also know, I am hoping for a rebound to sell. This Dataprep is supposedly to be strong.
Dataprep suddenly falls below the 0.70 price level ...0.69...0.68....0.67.......
Me : Uncle, you better cut loss now, market looking really bad.
Uncle: I know, but I can't sell now, because I am now losing more than RM 400 now. Let's hope for a rebound.
Does this "Uncle" sounds just like you?
If you want to trade successfully in the stock market, the most important rule is define your risk before you put in a trade and obey your stop loss. Playing the stock market is just like playing poker. In poker, you are to put in a wager bet before you get to see your cards. If the cards that you receive are crappy, will you still continue bet on? No, you don't. You forfeit the wager bet and start a new game with a new bet. Likewise, in a stock market, there are always many opportunities for you to make money. If the current trade that you are holding are showing are showing a loss, sell it and move on to other better trade. Never hope for a rebound, but instead fear that it will develop into a bigger loss. Remember, if your stock falls 50% from your buy entry, it will now need to rise 100% to touch yr original buy entry. So:-
Step 1: Define your risk. You can based on % percentage loss, dollar loss, or price support. If you buy a stock at RM 1.00, you may wish to risk only 5% pullback. Thus the stop loss price will be RM 0.95.
Step 2: If the trade hits your stop loss, just sell it. Don't let your emotions control you.
If you trade 10 times this month. 6 of your trades are 5% losses, while the remaining 4 are 20% gain. You will earn a very good return, because:-
20% X 4 winning trades - 5% X 6 losing trades = 50% Return.
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