Believe it or not, there are many investors that don’t use a stop loss.
That can be costly.
For example, my buddy Brad turned $2,000 into $15,000 with Bitcoin at one point. Not only did he not pull any money off the table from the win, he never set up a stop loss.
So, when Bitcoin plummeted, so did Brad’s investment… to less than $2,000.
To say his wife was furious was an understatement.
It’s just an insurance policy in case your stock pulls back too much. It also protects you from losing too much money. Some traders use a -25% stop loss for example. If the stock falls 25% from your buy-in price, the stop is triggered and the trade is over.
Investors can also use a trailing stop loss.
What’s nice about this one is that it removes all emotion from the trade. If your stop is hit, you’re out automatically. There’s no second-guessing. If your stock pushes higher, the trailing stop resets higher, too, never triggering until it plummets.
With a trailing stop, if my trade drops by let’s say 15%, I’m automatically stopped out, no questions asked. Now, if the stock continues to move higher, my stop is never triggered. It allows unlimited capital appreciation.
As long as a stock keeps going up, the trailing stop will never get triggered.
Such a stop keeps us from selling our stocks at the wrong time while in a solid uptrend, while preventing losses from wiping out your portfolio. Basically, it forces a stock to be sold. No emotions. No fretting. It’s all automatic.
This strategy keeps you in winners and gets you out of losers. And over time will go a long way to making you a much wealthier investor.