The #1 rule of investment success? Keeping losses small (8-10%). When you are wrong about a trade, admit you are wrong and move on. It’s as simple as that. Get over your need to be right, or it will devastate your portfolio. In fact, by keeping losses small, you only need to be right about half of the time to be considered a successful investor. Remember this fact because it’s important.
Think about it.. three consecutive 8% losses can be overcome by one 30% move in a stock. Believe me when I say that buying a successful breakout of a leading stock can yield you a 30% gain in just a couple of weeks if not less. However, hold onto a loser for a 50% loss and the stock would have to bounce back 100% for you to recoup your losses. Many who held onto their losses throughout the bear market of 2000 may never recoup their losses.
In a recent recommendation to my members at SelfInvestors.com, I highlighted a breakout of Aluminum Corp. of China, which had just surged to new highs on heavy volume. Within days, the stock reversed, fell back into its base and ultimately plunged below major support. A sell decision was recommended just as the stock fell below major support of the upper trend in green and the 50 day moving average in red (see the chart below). As you can see, by holding onto the stock you would have suffered a crushing loss as the stock plunged another 25% over the next couple of weeks.