A certain percentage of stocks you choose will show themselves to be losers. These losers must be dealt with in some way in order to limit their impact on your overall performance.
Once a stock starts to decline it can become a viscious cycle, leading to even more declines.
As unbelievable as it seems to the novice investor, the more and longer a stock declines the more it is apt to continue declining, or continue going sideways.
Even if a stock does come back, it will likely take a long, long time to do so, and time is money! For this reason, it is important to stop the bleeding once it becomes apparent that you have chosen a loser.
What is the investor’s most valuable commodity?
His initial capital, of course!
What should be of paramount importance is the preservation of your starting capital. This is your life. This is what will keep you in the game, and it is foolish to do anything that will jeopardize it. That is why you should never be willing to let a position go against you by more than 8%.
If you have entered the trade properly, and your timing was precise, the issue SHOULD NOT decline by more than 8%. Otherwise, something has gone amiss and the trade should be eliminated with no questions asked.
But what if it’s a blue chip company? What if the earnings are still positive?
Frankly, these are the rationalizations of an amateur!
The earnings of a company don’t put money in your pocket. Neither does the color of the company’s chip!
There is only one thing that can put money in the bank if you are long the stock. That is a RISING STOCK, not a declining one.
Remember, all stock are bad, unless they go up!
Cut your losses at 8% and move on!