Let’s get practical today.
In the past, I’ve talked about how my 18.6-year cycle helped me understand the markets and invest.
It was the biggest breakthrough I have made as an investor, and it helped me and my readers immensely.
But today, I want to talk about the investing process. Namely, how to make sure that you protect your capital and remove any emotion from your trading.
Emotions get in the way… this is why I don’t rely on any “hunches.” From a bigger perspective, I use the 18.6-year cycle to guide my knowledge of where the economy and the stock market are headed next.
From a practical standpoint, when I invest, I am aware of two emotional risks…
This Advice Could Put You Ahead of the Investing Crowd
On the one hand, you need to take profits when they’re due.
If you buy shares of a company and it doubles, you need to take some money off the table and let the rest work for you risk-free.
For example, if you buy a stock at $5 and it doubles, sell half.
By doing this, you recover your initial capital, and now you’re playing with “house money.”
This is your “risk-free” upside. And nothing should give you a greater sense of calm as knowing that even if everything goes wrong with the second half of your trade, your original capital is safe.
Nothing.
On the other hand, you need to use stop-loss orders.
Letting your losing positions sit there destroys morale and capital.
“Ηope” for an eventual rebound is toxic. You may never see your position recover, and you’ll be anxious in the meantime.
This is why we use stop losses.
The Stock Market Is Not a Supermarket
A lot of people approach the stock market like it’s a supermarket, always looking for bargains. This is precisely the wrong way to trade.
They get caught up in the idea they’re paying a high price for a stock.
At my brand-new newsletter The Signal, we search for new highs… combined with chart analysis and matching the sector to the stage of the 18.6-year real estate cycle… and we ride them up.
We don’t aim to “buy low and sell high,” we aim to “buy high and sell higher.”
But if a stock doesn’t move how we expect it to… we’re getting rid of it, no questions asked. Just like firing an employee who’s putting out subpar work.
We’ll always stick to this principle: “an uptrend should never become a downtrend.”
And that’s why trailing stop losses are the best way to manage risk.
The Best Way to Manage Risk
Trailing stop losses work like this…
If you buy shares of a company at $100 and decide to put a 15% stop loss on the position, your position will be sold if the share price drops to $85.
But let’s say the stock price rises to $120 before that. Since you set up a trailing stop loss order, now your sell price is adjusted to $102.
The 15% trailing stop loss is adjusted to the highest price the stock gets to.
So even if the share price dips by 15% and your sell order gets triggered, you’ll sell your shares at a 2% profit.
Trailing stop losses are like an automatic braking system for your car.
You need them for every “buy” order you place. (Call your broker and ask how to do it if you don’t know how.)
They can definitely save you from a crash… so use them.
Regards,
Phil Anderson
Editor, Cycles Trading with Phil Anderson
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