The Importance of Stop Losses
Mar 23rd, 2009 | By Charles Delvalle | Category: Chart of the DayOver the past few weeks I’ve talked about the importance of consolidation patterns. But the thing about consolidation patterns (and practically every other pattern you’ll ever learn) is that there’s NO GUARANTEE that the pattern will follow through. That’s why it is important to set a stop-loss to protect your portfolio.
Back on the 18th of this month I told you that Apple Inc (NASDAQ:AAPL) was trading in a price range of $83 to $100 a share. It was a pattern that had been ongoing since last November.
I said…
Here’s my big, bold prediction: AAPL is heading south. Short AAPL (or buy a put option if you’re feeling saucy) and ride the sucker down to $83 a share.
That’s a nearly 20% profit.
Always remember to play it safe by having a stop-loss before jumping into the play.
Check out this chart to see if this pattern played out…
As you can see, Apple soared past $100 and is now sitting at $108 a share. The call was wrong which is why it’s so important to place a stop-loss with every trade you make.
What’s the correct stop-loss to use? When pattern trading I usually look for a 5 to 1 reward/risk relationship.
So in the Apple example, if I expected gains of 20% then I’d place a stop-loss of 4% to keep myself safe.
Remember, losses will ALWAYS happen; it doesn’t matter if you are Joe the Plumber or Warren Buffet. But what separates the good from the great is the ability to get out of a losing position quickly and get into a winning one.
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Charles Delvalle is a self-taught market-timing professional and value analyst who's followed and invested in the market for the past ten years. He uses a unique combination of technical and fundamental research to pinpoint rapid profit opportunities with stocks and options.
Charles is also a staunch contrarian and takes pride in finding undervalued sectors and discovering undervalued, cash-rich companies. He frequently mocks government stupidities and points out the "inaccuracies (or lies, take your pick) that government reporting frequently dispels as "truth".
