Understanding Stocks 2E, 2nd Edition

7

Learn How to Limit Losses

It’s true that not everyone believes in selling stocks, especially buy-and-hold investors. Unfortunately, one of the most common ways to lose money is by not getting out of a stock in time. Speaking from experience, failure to cut losses on a losing stock is a sure way to lose a fortune—and your self-confidence.

As you have learned, before you buy a stock, you should have a written plan with two prices.

1.  Your buy price.

2.  Your planned selling price.

Finally, the plan includes a third price, an emergency escape price that limits losses. Typically, the escape price is 5 percent or more below your entry price. Note: Some people will use a 7 or 8 percent escape price, but you can establish your own loss limit. ...