Know When to Say When

We have all been there…

Sitting at a bar, head in your hands, you’re wondering how it happened. How could your favorite stock have fallen so far, so fast? It looked so promising months ago. But here you are, sick to your stomach over it.

You’re tempted to hang on to the stock and wait for it to rebound. You bought it at $30/share, and it is now $20/share. You want your money back. And it shouldn’t take too long to make back that $10/share, right? A few good days in the market, and you’ll be back to even…

Not so fast. When it comes to “recouping” losses, you have to look at the equation in a different way.

It’s human nature to look at the percentage of the loss and figure that is what the stock needs to increase by in order for you to break even. In this example, if you’d bought the stock at $30/share and it is now worth $20/share, you are sitting on a 30 percent loss. But in order to break even, and see your $20/share stock go back up to your purchase price of $30/share, it would have to appreciate by 50 percent.

Ask yourself if that kind of climb is possible. If you don’t think it is, it might be best to minimize your loss at 30 percent. There is nothing worse than watching a loss keep on growing while you hope and pray for a recovery.

It is critical in any trading situation to remove emotion from the decision. So set a stop-loss point on all trades to manage your downside.

[Ed. Note: Yes, it’s hard to keep your emotions under control when you’re dealing with money. So one of the best things you can do for your bank account is to follow a proven system for investing. ETR’s experts can easily teach you the secrets behind their top trades..]