Profit Strategy vs. Protective Stop

Forex Trading | by ForexCycle.com | Thursday, 17 April 2008 07:53 UTC

Developing a profit strategy and setting a protective stop is inevitable in every investment. Just as protection of capital or the money you invest is important, so also is necessary the protection of your profits for the money earned. In due analysis of the most effective exit systems, it is found that as the price of stock increases, you can move the stop loss higher. And in case of downtrend, the price will trigger the stop and a sell order will be executed.

However, the basics of successful trading lies in the fact as to how close to the price the stop should be set. While setting the stop loss, care should be taken that stops are not set too close to the current price. Because, there remains a possibility that the variation that takes place in the market can set off a stop, even if not a real downtrend in price.

While people do a lot of research on the kind of investments, they should make and do a lot of work and diligence on when and where to buy; it is exit strategies that most of them give a slip. However, it is one of the fundamentals of investment as it is impossible to plan future investments and trading unless you specifically know how you are going to take your profits and make an exit.

Just as we all know that, stock prices always follow corporate earnings, resulting because of stock investing and buying by traders when companies are making money, thereby propelling stock prices higher. Similarly, in event of companies showing slower earnings growth, stocks fall.

All you need to do for successful exits is to chalk out practical exit strategies for setting stop. A few of the most implemented strategies are defensive market timing, hedging bets and to think globally. While traders are more focused trying to make big profits, the larger issue is however to avert bigger losses.

There are ways to undermine the best time to sell, from using technical analysis techniques like moving averages, etc. You can use defensive market timings by placing defensive stop losses. In this method, your broker can be instructed to sell shares on hitting a predetermined level.

Considering the strategy of hedging bets, it is found difficult to hedge a collection, with a range of arrangements that balance each other out. However, there is always the alternative known as inverse funds, which are designed to rise in value even when the stock market goes down. And in cases even when the funds falls, on the occasion of stock market rise, they can tender security without compelling you to sell your existing positions.

In the most adventurous trading, you can think globally for setting stop and target. In case, stock prices pursue earnings, the best way to defend your stock portfolio is to make sure to go along with companies, whose earnings are on the rise. Similarly, if U.S stocks are not doing well, traders can always look out for options in the Asian Markets and vice versa.

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