STOCK TRADING’S NUMBER ONE RULE
Bernard Baruch, one of the most successful stock speculators of all time said: “If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong.”
Trading stocks is a lot like hitting a major league pitch. In baseball you have to know which pitch to hit and which ones to let go. It’s the same with stock trades. You’re not going to be able to hit every ball you swing at, or make money on every trade. In fact, the majority of your trades will probably be losers, but you can still come out ahead if you follow the number one rule of stock trading.
NEVER LOSE MORE THAN 7-8% ON ANY TRADE.
Since you now know that loses are a part of the game, you’ll need a solid loss-cutting strategy. William J. O’Neil – founder of Investors Business Daily and author of the best-selling “How to Make Money in Stocks” says the number one rule in investing is to “never lose more than 7-8% on any trade.” Never!
Let’s say you have 3 losers that average 7% and you have one stock that runs up 25%, which is not unusual for growth stocks. You would still be ahead with only a .250 average (4 trades, 1 winner).
USE AUTOMATIC “SELL STOPS”
Most investors (even professionals) have trouble cutting their losses so I suggest that you enter a “sell stop” immediately after you buy a stock. Most online brokers make this very easy to do. This will sell the stock automatically once it hits the price you set and it will keep your emotions out of the trade.
GETTING TO THE “HALL OF FAME”
If you bat .400 you are a “hall of famer.” The same is true for stock traders. Babe Ruth had a lifetime batting average of .342 and is considered by many to be the greatest baseball player of all time. It’s not about winning more trades than you lose, it’s about keeping your losses small and letting your winners run.
Ruth got a hit only about a third of the time he was at bat. When he did get a hit, he got base hits more than he got home runs. But the home runs more than made up for all the strike-outs he faced. You will find this to be a great analogy for stock trading.
Tags: stock trading, online trading, loss cutting, stop loss, sell stops, bernard baruch, william o'neil, jesse livermore, babe ruth
