Point Roberts, WA and Delta, BC - May 18, 2017 (Investorideas.com Newswire) Investorideas.com, a global news source covering technology, releases new commentary from renewable energy expert Peter Lynch.
Keys to the #1 Stock Market Skill All Investors Need
In my previous article (19 April 2017) my main focus was to explain to readers my system of investing and its consistent past success. In addition I went over (a number of times, because it is SO important) the #1 Rule of Investing.
To repeat - the number #1 rule of investing is:
Cut your losses short and let your profits run
As most experienced investors know, the hardest thing to do when investing in stocks is knowing when to sell the stock. If you do not know when to sell or cannot sell (i.e. you fall in love with a stock and try to make it do what you want it to) then you cannot utilize the #1 rule of investing because you cannot limit your losses by cutting them short i.e. getting rid of the stocks that are not working before they go down too far.
How can you accomplish this?
The Two "KEYS" you need to utilize and execute the #1 Rule of Investing are:
These two keys must be used in conjunction to give you the optimal price to place a stop at and determine how many share you can buy given the stop you have chosen.
A Stop loss is a predetermined (i.e. before you buy a stock) price at which you will sell a position ….no questions asked, no thinking about it more. Stop losses are designed to limit risk and remove emotions (your worst enemy) from your investment decisions.
There are a number of methods to determine what stop loss percent to use for each stock.
Position sizing is the 'tool" that will tell you the number of shares you can buy of each stock based upon the stop loss you have chosen and how much money you want to risk on that stock.
Stop Loss and Position Sizing Example
Let me give you an example of how the two "keys" work together.
Let's say you have a portfolio with $100,000 (for ease of calculation) and you want to start investing. You have decided that you do not want to lose more than 1% of you portfolio on any one stock - this is a very common percentage to set for a stock transaction and most of the time the one I will use to determine the "ideal" trade stop.
You decide the first stock you want to buy is Hydrogenics (HYGS) which is a leading renewable energy stock in the fuel cell sector of the market. You see that it is just starting to show some strength and would be a candidate for your portfolio.
The stock closed at $7.15 on Friday the 12th of May 2017. Its historical volatility is very high at 51% and one should read that as very risky. However, I think the company has tremendous upside potential, is technically positive and a worthy candidate for the portfolio.
Using the volatility stop loss mentioned above you could buy 242 shares of HYGS for a total of $1,944.80 with at stop price of $3.48. If the stock exceeded its volatility limits (greater than 51%) you would end up with roughly $944.80 dollars after you sold your 242 shares at the stop price therefore limiting your losses to approximately 1% of your portfolio. This $1,000 loss is the limit that you determined was the most risk you wanted to take on any transaction in your portfolio.
Volatility Trade Stops and Position Sizing
In conclusion, this method of handling the risk in buying stocks in the market is the best and most optimal I have ever seen. I would also mention that a very large percentage of professional traders use this method or another very similar to this as their "method" of maximizing their gains.
For any stocks that I mention in my future articles I will also include a stop lost point and the appropriate position size to maximize your gains and keep your loss to 1% of a theoretical portfolio of $100,000 should the stock not move our way.
NOTE: you should never give your broker the stop price to put in the system for you automatically - unfortunately traders may take advantage of this because they can see where the stops are set and may drop the stock and then take it up. It is best to watch your stock, if it closes below the stop price at the end of a trading day then have your broker sell it the next morning.
The Renewable Energy Expert Corner with Peter Lynch can be found at http://www.investorideas.com/Companies/RenewableEnergy/ and www.renewableenergystocks.com
Mr. Lynch has worked, for 36 years as a Wall Street security analyst, an independent security analyst and private investor in small emerging technology companies. He has been actively involved in following developments in the renewable energy sector since 1977 and is regarded as an expert in this field. He was the contributing editor for 17 years to the Photovoltaic Insider Report, an early publication in PV that was directed at industrial subscribers, such as major energy companies, utilities and governments around the world. He is currently a private investor and has from time to time been a financial/technology consultant to a number of companies.
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