Thread - Why is stop loss a must for investments too?
Ask yourself this question – Why am I investing in markets? If the answer is to gamble, God save you! Else, as most of us know, we are all in here to make money! 1/n
And, if you need to make money you need to protect your money as much as possible. But, how does one do that? By defining your risk or by defining how much you can lose per stock. But, how does one define “how much” or “the risk”? 2/n
Doesn’t matter if you are trading or investing, your risk cannot be anything more than 5% of the capital. What does that mean? If one has 500,000 to invest, 5% is 25000 of that. Can one digest losing 25000 in a stock when your capital is 500,000? No, right! 3/n
That is why I said maximum 5%. Best would be around 3% risk on a single stock and nothing more that.
How does this help you in the long run? 4/n
Let’s say you invested in stock A at some level because you heard lots of positive news in the media! Now, for some reason which no one knows the stock starts falling and now your portfolio starts to turn red and can get worse in the future depending on the market conditions. 5/n
A buy and hold investor would start to worry and start panicking, especially if you haven’t invested in good quality blue-chip stocks. If one had a predefined risk and exited when your loss hit that level, you would have been saved and had money to invest at lower levels. 6/n
Remember, markets always bottom at some point and you would want to have money to buy at lower support levels and wait for market to reverse. How to find these support levels is another topic, which I would explain in detail for sure. 7/n
If you are esp. investing in small or mid-caps, it is highly recommended to keep your risk pre-defined and exit. Remember a stock that is down 25% needs to go 33.33% to break even and a stock that is down 50% needs to go up 100% to break even and that is pretty difficult. 8/n
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- If everyone is talking about it on social media and it has already broken out
- If a stock has moved up already for the last few days
- If a stock is up more than 10% already from breakout zone
- If your SL is deep
2⃣ Enter only on breakout & nowhere else if you're trading breakouts...
Buy only…
- above breakout zones (no entry in no-man land)
- above a key resistance zone after a stock consolidates
- 1-2% above resistance zone
- Identify entry points(set alerts on TV/set GTT in zerodha)