Mike's 10 Must Follow Rules for Making Consistent Profits in the Stock Market
Rule #4: The Money Rule
There is one statement that I hear over-and-over-and-over when I talk to investors: "It is far easier for me to know when to get into a stock than to know when to get out!"
It might surprise you to know that I ALWAYS know when to get out of a stock. I never have to guess. And I don't believe you should have to guess either.
The reason that I never have to guess when to get out of stock is because I have a clear set of rules that govern my exit strategy for every stock. This exit strategy is unique to each stock because it is tied to the stock's historical volatility and the current money-flow either into or out of the stock's Industry.
To begin with, I have determined my threshold of pain. I know how much I can lose in a holding before I begin to get uncomfortable. For me, that number is about 8% to 10%. I have some subscribers who have told me their threshold is 5%.
Regardless of your number, you should have a strategy that begins to get you out of a stock when that stock's loss reaches and/or exceeds your threshold of pain.
Next, you should have a non-emotional methodology for calculating a price that you are willing to sell the stock. I use Stop Loss settings for this function. And, I use a formula (proprietary to TurnerTrends) to calculate the Stop Loss setting so that:
- It is low enough to allow the stock to fluctuate on a daily basis.
- It is high enough to get me out of the stock either at a profit or without undue loss (remember 'threshold of pain').
- I set it one time a week (except in unusual circumstances) and I only adjust it upward, weekly, for long positions and only adjust it downward for short positions.
Most importantly, you should have 3 types of Stop Loss calculations:
- Standard stop loss for stocks that you want to hold just as long as they are trending in your direction, but are willing to get out of as soon as they move against you.
- Long-term stop loss. I call this my 'keeper' stop loss. This is a stop loss set below (for long positions) my normal stop loss. This is for stocks that I want to stay in for a long (1 year or more) period of time and I am willing to let the stock move decidedly lower than my normal stop loss would permit.
- Aggressive stop loss. When the average price of stocks in an industry begin to trend lower, I see this as a signal to get more aggressive with my stop loss on all stocks in that industry. This is particularly useful when I have accumulated a significant unrealized gain in the stocks of that industry. I may put on a tight market stop loss or even a trailing stop loss of just a few cents under the most recent closing price. This has made me a significantly higher return than just using a standard stop loss approach.
The formula for calculating stop loss settings can be simple or complex. The TurnerTrends formula uses a stock's 12-month volatility factor and a time-based formula for calculating the amount of movement expected in a stock's price for the upcoming week. This "Expected Move" is then used to set the upcoming week's stop loss and is unique to each stock. Then, this stop loss setting may be overridden if either the "Long-Term" or "Aggressive" stop loss strategy is employed.
Regardless of the means or method you use in calculating a stop loss or exit point in your positions; the important aspect of this rule is to have a well-defined exit strategy. This strategy then, should take you out of a stock... not your emotion or the mood of the market.
Continue to Rule #5, Never Marry a Stock. |
