Knowing where to stop is our best friend

When we do trading or investment, knowing where to stop is important. The “stop” in this context means a “stop loss” or a “stop win”.

Making a trade should know (1) the price to enter, (2) the price to exit when the trade is against you, and (3) the price to exit when the trade is a winner. Once we know the prices, next question is to decide the position size, i.e., the number of shares to enter the trade. In case the trade goes against you, you already know the stop-loss price and the total loss in your account.

Without knowing these three components, the trade will not be successful. Even the buy-and-hold strategy needs to know these three components as well. It is the reason why Warren Buffet has to review his portfolio on a regular basis.

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