Most investors concentrate the majority of their time and effort into researching and picking the right stocks or commodities to invest in. The assumption is that this is the only step required to achieve investment success. That just seems like common sense. There are other steps, however, which must be followed or your account will be decimated. This is not something that will only happen a small percentage of time. Unless you adopt these procedures, your account will certainly be wiped out. These steps are not obvious, are not followed by the majority of investors, and aren’t very glamorous. Do your research, pick the equity you wish to invest in, then follow these steps I’m about to outline. If you don’t you will blow your account. That’s not a maybe. You will certainly lose all of your money if you don’t follow these steps.
The single mistake that wipes out accounts faster than a nuclear explosion?
Letting your losses run.
Yes I know you’ve done it. So have I.
You invest hours of research to pick your darling stock, and after you’ve dumped the majority of your account into it, you watch in horror as it tanks to new lows. What do you do? You say to yourself, it’s a good stock, after all, I researched it, and it will bounce back. But it never does. It keeps going lower, and you keep hoping. Before you know it, you’ve got nothing left, or lost a majority of your account.
Okay here’s how to do it the right way.
Before you buy, decide when you’re going to get out, and why. (For example, I will hold the trade until 36, at that point I will sell because that is the point below resistance, and holding longer will probably result in further losses. )
Secondly, don’t vary from your plan. This is the hardest part. Write it down so you’re reminded to follow your plan. Look at it while you’re watching your trade so you’re not tempted to wait longer.
Lastly, don’t invest more than 1 or 2 percent of your total expected stop loss in any one trade. Estimate where your loss point will be, and make that amount just 1 or 2 % of your total account size. I know this sounds like you will never make money, but the laws of probability can’t be messed with. If your using too much of your account to trade, sooner or later you will lose it. Period.
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