Using Stop Losses: A Key Strategy for Portfolio Protection

Understanding Stop-Losses in Trading

Using stop losses is one of the most important elements of trading if not the most important. However, this is the most often overlooked aspect of trading and investing. Egos and pride often are at the root of this problem and the consequences are the annihilation of the individual’s portfolio.

Why Every Trade Needs a Stop-Loss!

Every trade that is entered into, must have a stop-loss attached to it. It is simply asinine to not do so, especially if you are a retail trader that only reviews their positions periodically. Even the best of positions can go from being the market’s darling to being cut in half or worse within days. No one is immune to substantial losses in their portfolio and the worst thing that we can do is somehow think that we are the exception to the rule. In fact, when it comes to trading, I pay much more attention to this aspect of my trades then any other.

And that’s because controlling losses will keep you from portfolio ruin!

Implementing Effective Stop-Loss Strategies

Setting Appropriate Stop-Loss Levels

Typically my stop losses will run anywhere between 2-7% on each position. I don’t lower my stop loss under any circumstances. If a stock triggers my stop-loss, I’ll take the loss and move on to the next position.

Avoiding Common Stop-Loss Pitfalls

Under no circumstance do we ever tell myself that, “I will sell it as soon as I break even”. That is what losers do and we don’t consider ourselves a part of that mindset. Better yet, it’s almost like your asking Mr. Market to forgive you of your past sins and by doing so you will sell your position at the first opportunity to break even on the stock. It just doesn’t make sense.

The Dangers of Averaging Down

Another problem often seen in the stock market and by individual traders is the ideal that a position that is already looking at heavy losses, is somehow a buying opportunity.

Let me be frank: “Losers average Losers!”

I don’t average down as others do, thinking that because the stock is lower, I can now have an even lower entry price that is somehow ‘more favorable’, and that I should easily be able to make up the loss. Absolutely not, instead, I take the loss (assuming that my stop-loss has been hit) and as a result the loss is a minor one and not one that has been “doubled-down”.

A Time-Tested Trading Approach

I adhere to the old adage of “letting my winners run, and cut my losers short.” This simple yet powerful strategy helps protect our portfolio and maximize potential gains in the long run.

Remember, controlling losses is key to preventing portfolio ruin and maintaining a successful trading career. By implementing and consistently using stop-losses, you can significantly improve your trading outcomes and protect your investments.

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