Investing: Your Profit/Loss Plan

A profit/loss plan is an important step that many investors unfortunately overlook. This is basically a set of limits that determine the maximum loss or gain that any given investor can take on an asset. Containing your losses is obviously very important, so the profit and loss plan is crucial to your strategy. Here’s how to form a solid plan for limiting your investment losses…

Devising the Plan

Devising a profit/loss plan may turn out to be a lot trickier than you might expect. First of all, you need to establish the maximum gain and the maximum loss you’ll accept from your investments, but these shouldn’t always be the same for every stock. For example, a small-cap growth stock is much more likely to rise and fall by 10% in a given year compared to a blue-chip stock. You need to analyze each stock on an individual basis, and make a good estimate as to how likely it is to rise and fall. A lot of investors use technical and fundamental analysis through high-end trading platforms to do this, which is one more reason why you need a Falcon trading computer! Another, albeit slower and less accurate way of doing this is modeling your plan on the performance of a specific benchmark, such as an index.

Putting It into Action

Once you’ve settled on your figures, whether they’re aggressive or conservative, it’s time to put your plan into action while avoiding as many hiccups as possible. Remember that there are two sides to this. You’ll need to sell your stocks both when they rise to a certain level, and when they fall to a certain level. Brokers won’t let you make two different selling orders for a single security, so you need to take some time to decide which one you’d like to enter first. In many cases, it’s wiser to start with orders that protect your downside. Consider using a stop-loss order, which will instruct your broker to buy or sell a certain stock once it reaches a given price. Precautions like this will ensure that you don’t get burned when the market is on a downturn, especially if you don’t have the time to keep tabs on your stocks every hour of the day. Still, when you’re first setting up stop losses, you should make a point of keeping an eye on the market’s swing. If your price winds up appreciating up to your upper parameter, you’ll need to change the price of your stop loss order.

Maintaining Discipline

Once you’ve put a well-thought out profit/loss plan into practice, all you need to do is stay disciplined, and remember that the whole idea behind the plan is establishing strict limits on when to sell. It can be painful to see a stock keep on rising after you’ve sold it, but it’s better to sell when it’s on the way up, rather than simply waiting until you’re forced to dump the stock due to its rapidly collapsing price. Don’t hold out for top dollar if the risk is too high!