To The Moon

The reason why it is difficult to make money in the stock market is that mostly it "goes against human nature".

For example, human nature drives people to be risk-averse when the stock makes money, rushing to sell the stock and put money into their pockets; and people become risk-seeking when losing money, and are eager to "win the initial investment back" ......

It is common. But following human nature means that you are very likely to lose money in the stock market.

There is a golden saying in the stock market: "Cut Your Losers and Let Your Winners Run". How to Stop Loss and Take Profit is the most important criterion to distinguish winners and losers in the stock market.

To summarize, it basically goes like this: Losers don't stop loss but take profits, while winners don't take profits but stop losss.

Stopping losses cannot be overemphasized. In fact, I think if you can't stop losses, you shouldn't trade stocks. Why do you need to stop losses? Many articles have explained the reasons, but I’d like to elaborate on two points that haven't received enough attention.

1. Losers don't stop loss.

When you don’t cut your losses, you lose your time and potential to enjoy compound interest.

Many people do not stop losses because they think the stock will rebound: as long as I hold it for a long time, the stock will go up one day.

But it's completely wrong.

Let's assume you lose 20% on one stock. But you don't cut losses and prepare to hold it for a year. If you want to get your money back, the stock would have to go up 25% in a year. When you don’t stop losses, you waste one year on a wrong and weak stock.

However, there is another option: you stop losses and then accelerate turnover. If you had lost 20% on one stock, if you then sell that stock, reinvest the proceeds, and make 5 trades where the stock goes up 5%, you will have made back all of your money. 

It's way harder to have one stock go up 25% in a year than to have several stocks go up 5% in a few months.

If you choose to stop loss, you will take advantage of the magic--"compound interest"!

2. Winners don't take profit.

When you take profit, you earn less money.

Many retail investors rush to close their positions and put the money in their pockets with every small profit.

It is totally wrong. In the stock market, the losing stocks outnumber the profitable stocks. To make money, you have to "make full use of" your profitable positions.

From my own perspective, I lost money on most of the stocks I invested in 2021. But I gained more than 10x on 3 stocks with options, which accounted for 80% of my gains in 2021!

Of course, profitable stocks need to be sold when the trend changes.

Here's a sign: you sell a profitable stock only when something fundamental about your investment thesis changes. 

In other words, for profitable stocks, you don’t sell when it goes down, you only sell once you've realized that there are even better investment opportunities. 

Will you Stop Loss or Buy the Dip?

Have you ever stopped your profit?