Position Sizing and Risk Management
I bought Sears Holdings (SHLD) on friday, and today it dropped 10% on lowered revenue guidance. This is the 2nd time SHLD has missed revenue estimates for the quarter.
Luckily, I only had about 2.5% of my portfolio in it so my losses were minimal. You never know which stocks will do well and which ones will flake on you. So you keep your position sizes small. It may prevent you from achieving great wealth, but it also prevents catastrophic losses.
Its also a good idea to bail on a stock if it drops 10% below your purchase price. I have a strong feeling that SHLD will rebound, but for now I’ve chicken out. “He who trades and runs away, lives to trade another day!”
The idea is to let your winners run and to keep your loses small. And never let your ego get in the way of your trading. Once your ego sets about trying to prove who’s right, you lose rationality and your performance will definitely suffer.
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