Increase your odds of winning - Money Management

Hello again,

Here's me learning about stock market investing, and thinking I'd really like to find that failsafe strategy for making bucket-loads of cash, with no real risk. Sounds familiar? Well, whilst that's not likely to happen, there are facets of investing that are not really to do with the market itself, that allow you to stack the odds in your favour. What are they? I'm not going to tell you that, otherwise you'll make money. Only kidding.

When you lose money, if you set a limit on your losses, a point at which you get out, and take the loss, like a man (if you're a man) So, let's say that you set a stop loss limit at 5% of your investment.

finally, another way of looking at the market instead, is to set up rules so that when you make say 50% on a share, you sell. Yes, you're foregoing the possibility that you might gain another 50%, but you have 50%, and can get out, and back into another trade? You'd probably use this method if you're not too familiar with technical analysis, otherwise I'd imagine that you'd look for patterns.

Now, there's the upside. It's nice to be able to protect earnings from becoming losses, but if the market is a rampant bull, then better to let that bull run free, and make tons more cash, right? Well, you can do that, but what happens when that stock goes from $10 to $50, and then back to $11? Yes, you've made a dollar, but in effect have lost $49 for each share. So, in comes the profit protection stop loss, which again, you could set to being 5% of the highest price, upon which you cut your losses and take the profit.

So, you get 100 shares at $10 a share, and they go down significantly, when they reach your 5% stop loss point, you sell, which means losing only $0.50 for the share, whereas somebody who doesn't have such a strategy will lose a lot more.

So, if you assumed that the share market at any point in time will go either up, or down, you'd have a 50/50 chance of picking the right direction. In that instance you would make 50% of the increase in prices for the 50% that you get in the right direction, and lose 5% in the 50% that you pick the wrong direction. If you look at those figures you can see that in such a 50/50 market you can't lose more than you make.

Good, isn't it?