Trading in stocks is much more than buying and selling stocks – it’s a battle that is exciting and profitable only if you are clear about your goals and stay focused, keep your emotions under control, and do due diligence. You must have an open mind and keep learning the trade tricks while gathering knowledge about market movements and acquiring the skills to assimilate all information to make a well-informed decision, believes Peter DeCaprio. The most critical aspect of trading in stocks is to use the best risk management practices so that losses, which are unavoidable in trading, do not go out of control.
Although the objective of investing in the stock market and trading in stocks is to earn a profit, you must be ready to accept losses that are bound to happen. It would help if you never lost sight of Profit while trading but at the same time take a strategic approach to cut losses by applying various techniques like stop orders, protective puts, and profit-taking. It will ensure that you are always in the game and can sometimes be at the top of your game by executing the strategies correctly.
Plan your trades
Spend more time on the drawing board to create trading plans than actually carrying out trades, advises Peter DeCaprio. Planning and strategy will help you win the battle and not your courage or the urge to win as it happens in real wars. Since the results are more important than the efforts, proper planning helps to ensure the right results. The better you plan, the higher are the chances of success.
To plan your trade, make proper use of the techniques of Stop Loss and Take Profit which are essential tools to control losses. Intelligent traders know the buying and selling price of stocks that suit them the most. It helps them to gauge the returns from the trade for achieving their set goals. If the effective return after adjustment is favorable enough, they execute the trade.
Setting stop-loss points effectively
To set stop loss and make Profit effectively, you must depend on fundamental and technical analysis data. Timing is a crucial factor when trading in stocks, whether buying or selling. Flexibility in holding or selling stocks increases the effectiveness of the decision. For example, if you are holding stocks ahead of earnings while excitement builds up, you might sell the stocks as the excitement peaks even if it is yet to hit the take profit price.
Calculating expected returns
To calculate the expected returns, you must depend on how you set stop loss and Take Profit. This calculation is essential because it compels traders to revisit their trades and try to rationalize them. In addition, it gives traders a systematic way to compare various trades and choose only the ones that appear to be most profitable.
The formula for calculating expected return is given below:
[(Probability of Gain) x (Take Profit % Gain)] + [(Probability of Loss) x (Stop-Loss % Loss)]
The trader uses the result to measure it against the opportunities to identify the stocks worth trading. Although there is no certainty about gain, at least the losses would be minimal.
