Candlestick Trading Blog
February 9, 2010
Protect Investment Capital
| Managing investment risk is learning to protect investment capital. Investors or traders can protect capital by diversifying an investment portfolio, placing limit orders on stocks, and to never trade or invest all capital at once in one stock market investment. No investor or trader ever is 100% successful with every investment and every trade. The ability to cut losses before they become huge is a learned skill. Sometimes stocks break out of support and resistance zones. Sometimes stocks are subject to substantial corrections. Knowing companies and market sectors helps determine if a drop in stock price is a correction or a new downward trend. Having a standing rule of when to cut loses and protect investment capital allows investors and traders to come back from losses. Not doing so is a too common story when investors and traders hold on to a losing stock all the way to bankruptcy, the company’s and theirs. Day trading is done with a margin account. SEC rules require a minimum of $25,000 in a margin account to continue trading as a day trader, or pattern day trader to use the SEC’s term. Scalping in small amounts on a volatile stock trading at high volume can be very profitable as the day trader follows an upward or downward trend. However, volatile stocks are just that. They follow a trend and then abruptly reverse course. If the day trader gets caught on the losing side of the trade he or she needs a plan in place to protect investment capital. Not all trades are winners. Getting out of a losing trade, fast, preserves capital for the next trade or investment. A useful way to view capital is as one of the traders stock investing tools or trading tools, just like the trade station and stock trading software. Just like a trader will take care of the other tools of the trade he or she needs to protect the capital needed to invest. Trading options can also be a way to protect investment capital. For example, a trader believes that a stock will go up. He or she purchases a call option on 100 shares of the stock. If the stock goes up he or she will purchase at the strike price and sell at the spot price making a tidy profit. However, the company has a bad quarter and the stock drops precipitously. Because the trader does not buy any stock all he or she loses are the premiums paid on options contracts. Another example of how to protect investment capital with stock options is an investor in a startup company that has been very successful. The stock price has gone up substantially. The investor believes that the stock will go up more so he or she does not want to sell just right now. However, the stock is in one of the more volatile market sectors and may very well experience a substantial correction. The trader purchases put option sufficient to cover his investment. This type of “insurance” costs the stock premium and lasts the length of the options contracts. If the stock goes up, the investor benefits, minus the cost of the premium. In situations like these if the stock goes down investors exercise put options and sell stocks at thee strike prices buying again at the much lower spot price. This is an excellent way to protect investment capital. Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
|
 |
|
 |
|
 |
|
 |
------------------------------------------------------------------- -
0 Comments:
Post a Comment
<< Blog Home