Markets have hit a barrier in the near term. The charts are concerning, as the NASDAQ, DOW, and S&P 500 are all trading just below their respective key 50-day moving averages on neutral Relative Strength. The near-term technical view for the NASDAQ and S&P 500 are bearish. The key U.S. indices are again underperforming the Chinese Shanghai Composite Index (SCI) this year. The SCI is up 5.02% this year, well above the key U.S. indices.
So, before you get too ambitious and begin to chase stocks higher after dips, let me give you a piece of investment advice.
The key to successful stock picking is to understand the concept of risk management as an essential element to investing success. The reason why I want to discuss risk management is my sense that there are some of you who probably fail to incorporate some sort of risk-management strategy. If you do, that’s fantastic and you are probably sleeping well at night. If you have been delinquent in this area, be careful.
I have been involved in the markets for over 20 years. After reading the strategies of some of the world’s best traders, a commonality surfaces: the most important tenet in trading is preserving your investable capital via the use of risk management. The last thing you want to happen to you is to trade sloppily and lose your tradable capital. Instead of being a player in the exciting world of trading, you would be relegated to watching from the sidelines. But guess what? You can avoid this by following some simple strategies.
When the price of a stock trends higher, you should always think about a potential exit strategy. This does not mean liquidating profitable trades, but rather protecting your unrealized gains.
If you have a price target for your stock, you can sell the stock when it reaches that target. Alternatively, if the gains are significant, you can take profits on a portion of the position and let the remaining portion ride. For instance, if a stock rises by 100%, you can liquidate 50% of the position and let the remaining half ride. Under this simple strategy, you realize some profits, but at the same time create a zero-cost trade, as you have already recouped your initial investment. You can view the remaining half as your risk capital.
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