Decreasing Risk and Maximizing Returns

To be a premier investor, you must learn how to decrease risk and maximize your return. Lets forget about diversification and options. Let me introduce stop loss and limit orders. Say you want to buy Apple at $90 a share. You think it will pull back enough that you can capitalize on a few extra points. While you are at work, you don't know where Apple is at or how close it is getting to the $90 you want to buy at. Limit orders allow you the flexibility of putting in a trade and have it process when you want it to. If I put in a limit order to buy Apple at $90, the order will process as soon as it hits $90. If it doesn't hit on Monday, the order will stay open on Tuesday and for as long as you want until you cancel it. This allows you to let the stock pull back and then order even if you can't be beside the computer when it does.

Stop loss orders help you to sell when a stock pulls back from where you bought it. If you had bought Apple at $90 on that limit order and decided to hedge against any downside, you could incorporate a stop loss. If you set that stop loss at $5 or 5% (can put in either dollar amount or percentage), your Apple shares would be sold if Apple hit $85. This keeps you from hanging on to the stock any longer than you have to and prevents losses from getting too deep. A trailing stop loss would be more recommendable. This keeps the stop loss trailing the stock as it rises. The Apple shares you bought at $90 go to $95. Now your trailing stop loss goes from $85 to $90. So if your shares then fall to $90, it sells.

Using both the stop loss and trailing stop loss maximizes potential. I would buy Apple and then put a stop loss on it to bail me out if the position turns sour. If Apple did indeed go up, I would cancel the stop loss and put in the trailing stop loss. This helps you to retain more profits. We all see a stock go up and then have a huge fall on earnings, yet still keep it thinking it will come back around. Using these stop loss orders, we cash out in the middle of that fall so we can retain some of our profit and keep from getting hurt. These are just a few ways to buy low and sell as close to a high as possible. At any rate it keeps you hedged against any risk of losing massive amounts of money. Too many people fall into the trap of buying more and more as it the stock price goes down or just keeping it while thinking it will come back. Remember, if a stock falls 50% it then has to return 100% to break even.