StopLoss: Expecting the unexpected with certainty.

Time to write about my favorite topic something that has made me a better person. Being an "Optimist", I am forced to think/imagine about only good things. In an ideal world, you don't always end up with good things. Life is interesting because you win sometimes and lose sometimes. Those who can learn something every time they lose keep increasing their chances of enjoying good things. Ok enough of philosophy!!!

Now if we have to use the same logic in Stock markets, it would be as follows: If you think that you will "Only" make profits in stock markets i have two words - "Dream On". Stock markets are an unpredictable beast. Like i have been saying in my earlier posts, it's all about preserving your capital when you are trading/investing. So how do you limit your losses? Or, put a stop to your losses?

You have to first come up with a strategy for trading/investing. This should define when you enter a trade, when you exit out of the trade. Ideally, the strategy is to first assume that the markets "WILL" go against your trade. Ok, if you did exit out of the trade, you again wait patiently for the next entry. You might be thrown around like this for some time, before the market starts trending in one direction or trends enough to give profits between your entries and exits. The exit level that you define is the StopLoss. If you ever want to invest in Stock Markets, never ever do so without understanding "StopLoss".

The same analogy in real life, does wonders :). Think of all factors that can go against you, before you start anything; you will definitely be better prepared for any unexpected challenges ;-).

-Sri