When analyzing a stock, it is just as important to analyze both the low and high price range possibilities. Setting both a low and high price exit point helps to solidify a trading strategy and allows one to control their risk. There are different methods to calculate this exit point based on a trader’s preferred risk management strategy. The low stock price is the price you feel is the point where you are confident the trade is wrong, and it is time to manage the loss.
Setting an exit price also allows you to manage the worst case scenario loss in capital based on one’s willingness to lose a percentage of their capital. When setting a low exit price, it is important to be aware of what that price will have as a percentage of one’s capital, and adjust accordingly. As part of this, as emphasized by many traders, one has to tolerate losing the possible amount invested. If and when a trader makes the wrong trade, he or she will have a stock price in mind where he or she will exit and mitigate any further risk.
It is important every trader understands the possible risk in capital when making a trade, and mitigating that risk by setting the exit price. Setting an exit price will also leave money on the table on the upside, but the benefits of maintaining a regimented trading strategy outway the losses that can occur without an exit plan.
Dealing with Unknowns
A black swan event is an event that comes as a surprise and has a major effect on the market. It is impossible to accurately predict black swans, as they are just fundamental events that occasionally take place in the economy.
Mitigating risk for black swans has less to do with accurately predicting the event, but rather having a long term plan that can take advantage of disruptions. A black swan event usually results in the same few consequences, meaning it is possible to hedge a strategy to have a safety net that could be profitable.
Having a contingency plan readily available can be the difference in maintaining wealth in an unpredictable event. This also applies to one’s trading strategy; if your trading strategy is frugal to the point it can be destroyed through a simple disruption, you need a new strategy to take into account different contingencies.
Composure under pressure and the ability to have a massive down day and continue with confidence are important to maintaining long term growth. As emphasized by many traders, an integral part of trading is how you handle the guaranteed and often unpredictable fluctuations.
It is impossible to be a winner on every trade, so losing on a trade is inevitable. By not dwelling on past trades, one can maintain sensibility and move forward without previous results impacting one’s attitude towards trading.