In analyzing thousands of trades and investments, I have found that many lose money because of their entry levels, not because of what they are buying or selling. This is, of course, also directly tied to a lack of any consistent risk management strategy.
Before making any investment, it is critical that you determine where your stop would go on either the long or short side. Based on this level, and where you are planning to enter the market, you can then calculate your risk.
By doing this calculation, you are likely to find that sometimes the risk is 8-10% or more. That is too high a risk, in my opinion, as a string of losers will quickly drain your account. Even one or two big losers a year can drastically reduce your chances of being profitable.
Regular readers of my daily columns know that I always give specific entry levels for my recommendations that are tied to the stop loss. Unless you are just buying a couple of hundred shares of a stock that trades over a million shares per day, you should always use a limit order.
If you use limit orders then the “market is rigged” chant of Michael Lewis’s massive publicity campaign is not a concern, as I have expressed previously. With a limit order you have agreed on the price no matter how it is routed.
|