One of the biggest challenges facing investors when trading the share market is when to sell. Usually an investor will be armed with many theories on how to pick the best stocks to enter the market, but when asked where they should exit, you often get a confusing array of examples that are, in most cases, more guesswork than solid theory. And herein lies the problem of the modern investor and the subject of this article.
The fact is, if you want to be consistently profitable, not only do you need to know how and why you are entering a trade, but more importantly, you need to know when and where you will exit. A common statement made by many investors is that they only ever achieve a good profit if they can pick their entry well. However, while this statement has some merit, it is only partly true and in my opinion is not the most important element.
Good money management means that you can be right in your analysis less than half the time and still be profitable, as long as the winning trades outperform the losing trades. Although you want to be right more often than not, what I am proposing is that trading is not just about picking winning trades, rather trading for profit is about using sound money management rules and good exit strategies.
You have probably heard the statement that ‘you can’t go broke taking a profit!’ But, in my opinion, this is a myth that is not only detrimental to your trading, but one that will set you on a path to financial mediocrity as it will cost you a lot of money. It may have surprised you to learn that you can be right less than half the time and still make money, provided you allow your profits to run and cut your losses short. This is because you can be right in four out of five trades, but your success and profitability will depend on how you handle each trade in regards to money management and exit rules.