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against both the strength of the impulse and the ease with which it can be put into action. |
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Limit Setting and Risk Management |
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Here are just a handful of tactics for balancing fear and greed that may be exercised by the disciplined online investor. First think about them and consider how they may fit with your personality. Then try them and see what you have the tolerance to stay with. If nothing else, some of them will clearly let you know your level of mental discipline and willingness to follow through with a plan. Many more considerations may be found in any good book that focuses on money management and trading tactics. |
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1. Know what you can afford to lose. Before investing anything, calculate what amount you can afford to lose if your stock goes down the drain. If it is 20 percent of your planned investment in this position, enter a stop loss at that figure. Although there are those who argue against the use of stop-losses, especially with volatile stocks, if capital preservation is of highest priority, they must be viewed as a useful tool. What they do psychologically is assure you that you will lose no more in your position than what you have determined you can handle. This helps deal with the fear of catastrophic loss. |
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2. Know your price target. Know what percentage gain you want when you enter a position. Write down this number and vow to stick to it, even when you begin to think it may be exceeded. The dictum of "letting profits run" is fine if you don't mind the added risk. But if you want to limit the likelihood of losing your profit, know your number and put in a limit order to sell at that price, at the same time you make the purchase. |
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Even if you think it will take three months for your stock to reach your number, still put the limit order in to sell at that price right after you make the trade. You can always change your mind. This will require agonizing discipline for some but it takes all second-guessing out of the equation. Think like a disciplined day trader, even if you're a long-term investor. Use stop losses liberally to protect downside loss. And use limit orders to sell to protect profits. |
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3. Sell partial positions. This tactic is common with professional traders and experienced investors. If you think there is further upside potential and have bought enough shares to do so, consider |
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