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Here is the question that was asked by one of the users:

>Also I am having trouble to know also when to sell a stock, how can I determine the sell point of a stock? I am
>using stop losses to control my downside but I am not sure how I can determine the potential upside of a stock.
>Say I but a stock at $100, put a stop loss in at $95. If the stock goes to $105, $108, $150, this is where I am
>having trouble getting my head around. To know what is a reasonable estimation of the upside of the stock.
>Sometimes I am stopping out too quickly (novice mistakes, but I am learning).

Lets tackle with the trouble of knowing when to sell first. Knowing when to sell a stock is difficult, and not always easy. I am glad to find out that you are using stop loss to control the downside.

First, let us look at the scenario that the stock went from 100 to 105. Just make math easy, let us say that risk management is 5 points. The initial stop loss at $95 makes sense. But now the stock has moved to 105, why not move your stop to 100 or 98 (in that range). This way you are cutting down the risk of your existing trade. If the stock moves to 120, then have a stop at 115 or thereabouts. This way you lock in the profits. Suppose the stock at 115 was stopped out. You can always reevaluate you position and enter again. The reason for having a mental stop loss or an actual stop loss is to have a discipline. If we were future-knowing time travelers then we would not need such discipline. But we are humble traders who realize that we are prone to making mistakes, thus a stop loss is needed. So if the stock moves up, move the stop up with it.

The other comment that really caught my eye was that I am stopped out too quickly - a novice mistake. This is a novice mistake or not so novice mistake. In any trading, you as a trader are taking on some risk. Sometimes, you take too little and sometimes you take too much. That is the nature of trading. And any trader, someone trading for years or someone new, they have to live with it. The question remains, if it is not perfect, why do we need the discipline. Here is why:

If a $100 stock declines 5%, so goes to 95, requires a gain of 5.26% to recover.
If a $100 stock declines 10%, so goes to 90, requires a gain of 11.11% to recover.
If a $100 stock declines 20%, so goes to 80, requires a gain of 25% to recover.
If a $100 stock declines 30%, so goes to 70, requires a gain of 42.86% to recover.
If a $100 stock declines 50%, so goes to 50, requires a gain of 100% to recover.

As you can see the relationship, as the stock declines, the recovery takes higher percentage gain than the percentage loss. So a 10% decline, has a 1.11%(11.11-10.00) penalty. Decline of 20%, has 5%(25-20) penalty. As the losses grows, the percent gain needed to recover goes higher. So it is better to make a mistake earlier then later.






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