by Aurelio Pena
FOLLOWING rules very strictly, even if they’re self-imposed, is something so hard to do in the stock market. But if you’re a very disciplined trader who follows trading rules to the letter, you can avoid losses and maximize your profits, making you a winning trader.
One trading rule that’s being broken all the time by both new and old stock traders is the rule of Stop Loss which reminds you to sell your stock at a certain point, say like 5% or 7% when the price of your stock starts to decline. This move makes sure your loss is very small so you can use the bigger bulk of your capital to buy a much stronger stock.
For example, if you bought stock at P35 a share and put your “stop loss” exit price at P33 a share, you must FORCE yourself to get out of that stock by selling or “unloading” it at P33.
Most investors and traders can’t accept any loss to their capital, even a small 7% loss, hanging on to their HOPE that the price of the stock will “recover”. In most cases, however, the price never recovers. Dili na gyud mobalik!
So, instead of accepting small 7% loss to their capital, after several months of waiting for the stock price to recover, they end up with a stock with a 50% to 70% loss, more than half of their capital gone forever. That’s how you get wiped out in the stock market. Gahig ulo!
Know what? You can actually make a lot of money on this same stock if you got out at 7% loss (by selling out at P33), then wait one or two months for the stock to fall before BUYING BACK the same stock at a much lower price.
Best example of this is the stock of Aboitiz Power Corporation, (the mother company of Davao Light and Power Company).
Let’s assume you have 20,000 shares of AP (Aboitiz Power) worth P700,000 after you bought it at P35 – which turned out to be the peak price before it started to decline.
Assuming you’re not hard-headed and follow trading rules strictly, you sold your stock and got out at P33 to cut loss. You got your capital back totaling P660,000 with only a P40,000 loss. (This loss is very small compared to the size of your capital)
After two months, the stock price of AP went down to as low as P26 a share. With your remaining capital of P660,000, you decide to BUY BACK at P26 a share and got yourself a bigger holding of 25,300 shares of AP. Mas daghan na ron!
If you followed stock market prices daily since January this year, the price of AP shares fluctuated between P26 to as high as P33 a share.
With the right timing, you could UNLOAD (sell) all your 25,300 shares of AP at P33 and collect stock sales of P834,900 or a net profit of P174,900 (after deducting your capital of P660,000).
Shortly after the AP stock price hit P32 and P33, it declines again to P29 and P28.
We see this as “guerilla trading” at its purest form — a “HIT AND RUN” in the stock market, because you lie in wait, hiding in the dark bushes, before hitting the stock price to get your profit — and running away!
Moral Lesson: To avoid getting wiped out in the stock market, strictly follow the STOP LOSS rule (with no hoping whatsoever), get out of the stock then buy back at lower price to sell it back at a higher price later.
(For comments, email me at : goldelyonn@yahoo.com or text 09084699301)
