| Trading on the stock market is a risky business. | | | | So now that we've dealt with your perception of |
| However, managing this risk and your perception of | | | | risk, we now need to make sure that you don't lose |
| this risk is the key to successful trading. | | | | all your money. This is done by making sure that you |
| The one thing that people fear most about trading | | | | always, I'll repeat that, always, put a stop loss on a |
| the stock market is losing all their money. One piece | | | | trade. |
| of advice that is rarely heeded is 'Never trade with | | | | A stop loss is an order to sell (or buy if you are |
| money you can't afford to lose'. This is sound advice. | | | | shorting the share) the trade you made if it reaches |
| Many people borrowed money to trade during the | | | | a certain level of loss. For example, if you bought |
| bubble only to see it all wiped out in the burst. | | | | Google (GOOG) at $460 and it subsequently dropped |
| So, how do we manage the risk and our perception | | | | rather than rose, your stop loss level is the point at |
| of it? Our perception of money is different from | | | | which you decide that you won't take any further |
| person to person. Someone who earns $1 million a | | | | losses. So, in this case I might put my stop loss at |
| year will not think much of losing $1000 but for the | | | | 10% less than my buy price. This means that the |
| person who earns $15,000 a year, losing $1000 could | | | | shares would automatically be sold at $414. I'd take a |
| be seen to break the bank. | | | | loss but I wouldn't lose all my money. |
| The way to change our perception is to think of | | | | Once you have set your limit to what you would be |
| money as a tool to make more money. We must | | | | willing to lose, you should never move it down. |
| detach our emotions from money. Think about | | | | However, you can move your stop losses up as the |
| trading with $500, would you be comfortable with | | | | price rises. I like to keep my stop loss trailing the |
| that or would you lose sleep at night? If you'd lose | | | | share price by 10% below but tighter stop losses |
| sleep at night then there is too much emotion | | | | (for example 4%) would be suitable in less volatile |
| attached to that amount. Try using a smaller amount, | | | | markets. |
| for example $100. Would you be comfortable trading | | | | Think about your trading as a business. In business |
| with $100? If this is better then this is your comfort | | | | you would have sales which would give you profits |
| level. Trade with this amount until you are happier to | | | | (winning trades) but you'd also have business |
| trade with more. | | | | expenses for example utilities, phone etc. Think of |
| Becoming comfortable trading with more money | | | | your losses as business expenses. By placing a stop |
| comes from experience. If you find that you're | | | | loss on all your trades, you ensure that your |
| profiting from trades more than you are losing then | | | | expenses don't go too high and wipe out your |
| you will build confidence in your ability to read the | | | | profits. |
| market. Don't become overconfident. As soon as you | | | | As you can see, there are ways to manage the risk |
| become overconfident the market will bite you. Keep | | | | in trading the stock markets. Managing your risk is a |
| your trades small and gradually build up to higher | | | | stock market basic and should be covered on any |
| value trades. | | | | good stock market course. |