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The Golden Rule of Trading

Most of us face two big problems as investors:
1.We don't know when to cut our losses short…
2.Or how far to let winners soar before taking our profits.
In other words: How to minimize risk and maximize gains.

But there's one strategy - used by many of the world's most successful investors - that not only solves this problem easily and effectively… but can help you make more money on your existing portfolio.

I'm talking about the "trailing stop" strategy.

These 2 simple words will keep you in winning investments longer, and get you out of losing investments sooner.

Here's how it works…

I'm sure you've heard it before: The first law of successful investing is…

Don't lose money.

In other words, you've got to cut your losers short - before they do big damage to your portfolio.

To do that, you have to determine - before you actually lose any money - how much you are willing to let any investment drop before you sell… 10%, 20%, 25%… it's up to you.

If any investment falls by that much, you sell the next day. No ifs, ands, or buts.

The easiest way to do this is to use a "trailing stop."

Say you buy a stock for $10. If you use a 20% trailing stop, you would sell that stock if it ever closed below $8 - 20% below $10.

However, if the stock went up from $10 to $20, you would move your trailing stop up to $16 - 20% below the new closing price of $20.

If the stock closes below $16, you sell - and make a nice 60% profit. Now it doesn't matter if the stock falls to $10… or even $8 - because you've already taken your money off the table.

But if the stock keeps moving up, so does your trailing stop. In short…

You let your winners run.

Trailing stops work because not every investment you make is going to be a winner. Even the best investors in the world make losing picks.

The real difference between those who consistently make money in the markets, and those who consistently lose, is that the successful investors make their losers very small… and let their winners run as long as possible.

Take David Ryan, for example. As I mentioned, Ryan won the U.S. Investing Championship three times - generating a 3-year return of 1,379%.

Amazingly, Ryan picks winners only about 50% of the time. He gets such high returns because he cuts the losers quickly. Ryan describes his strategy this way: "I make money on the few stocks a year that double and triple in price. The profits in those trades easily make up for all the small losers."

No wonder he calls trailing stops the "golden rule of trading."

The bottom line is, you've got to control your losses. Not doing so is the single biggest mistake amateur traders make by far.

In the words of Perry Kaufman, one of the leading authorities in trading system design, "Amateurs first look at profits while professionals first look at risk."

Using a trailing stop is the most effective tool I know of for easily and effectively investing like the pros.

Now here's the catch…

The Problem with Trailing Stops
The only problem with trailing stops is that they require a lot of work.

You have to pay close attention to the markets. And you have to do lots of different calculations.

Remember, when a stock goes up, your trailing stop goes up too. And if a stock goes down, you have to make sure it doesn't drop below your trailing stop price.

Talk about lots of free time wasted in front of the computer. Who wants to check closing prices and recalculate positions every day?

If you're like me, you simply don't have the time (or the inclination) to do this.

But that's the kind of discipline you need to make the trailing stop strategy - the most effective way to consistently beat the markets - work for you.

Article from www.wealthdaily.com