Know When To Fold

Tight Stops
Cut your losers!

Deciding on where to exit a losing trade is a critical piece to the investment process. When a position goes against you, the intuitive voice tells you to add to the position. However, this can often compound your losses.

Many professionals use the IBD 8% down rule. It depends on your risk tolerance, so make sure the amount you can lose on a single trade DOES NOT have a significant impact on the value of your invested assets.

Nobody is going to get every trade right, and it is important that you don’t let your losers get out of control.

When you enter a position, you need to know where you will sell, prior to entering the trade.


Last week, we shorted Gap Stores when the stock was trading at $26.25. Technically, it looked extended and fundamentally, we have it valued at $16.84 per share.

When we entered the trade, the recent high had been $27.01 and we felt that if the stock were to break above that level, it would head higher---time to get out. Therefore, today, when the stock crossed $27, we sold for a small loss.

The stock proceeded up from $27, to where it closed today, at $27.62

The moral of the story goes:

Everybody gets trades wrong, but what keeps you in the game is cutting losses by setting stop limits.

Speak Your Mind