In trading the stock exchange, no-one can predict the market with certainty. The price of stocks can go down, along with up. What is required is an exit strategy that will enable you to survive the bad stocks, and make a good profit on the good stocks.

The method that I have found to work the best is a trailing stop loss. For those who don’t know what a stop loss is, I shall explain briefly. A stop loss is an order for your stock broker to trade your shares if the cost dips to the level that you have specified.

The’re two ways of doing this. The easiest way is to prefer how much you are willing to lose as a percentage of your investment. A good rule is not to go under 10%. Work out the amount of the stock at this level and set that as your stop loss. As the price of the stock increases, keep moving the level of the stop up to keep the percentage gap the same. Some dealers supply a trailing stop loss service, where you let them know what percentage to set the loss at and they do it for you.

The second technique is slightly more involved, and comes from “Nicolas Darvas” in his book “How I made $2,000,000 in the Stock Market”. The markets tend to flow little by little. a stock on the rise will reach a peak, and then dip back off. It may do this several times at each stage. The idea is to follow the chart of the stock and see where the dips are the lowest, and set the stop loss just underneath them. A second part which Nicolas propounds is that when the stock breaks out of the sideways trend, to buy more of the stock, and when the stock starts going sideways again to move the stop loss up again to just under the lowest part of the dip.

Using the stop loss as an exit strategy, only works if you stick to it, and not lower it, thinking that the amount will go up again in a few days. In a few cases you will be right, but what usually happens is the cost keeps moving against you, and you loose even more money. As a secondary to this, the money still tied up in the first stock that is falling can’t be used for another trade.

Finally, a word of caution about applying the stop loss system to safeguard your capital. There are occasions when the markets undergoes a fast fall in price, the’re regulations about how far a price can fall in one-day. If it falls this maximum distance, it can bypass your stop loss, and you may be unable to trade. Although these situations are rare, it is advisable that you be aware of them. So that they are not a shock when they do happen to you.

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