Tuesday, July 30, 2013

Risk Management

In investing, risk management is always an integral and important part of investing.  We know we must always have your stop-loss ready, even before you enter a trade.  You can have no profit target, but you cannot have no stop-loss.  That's how important a stop-loss is.  And more importantly, you must stick to your stop-loss.  When it is time to sell, you have to sell, no matter what!  There is no what if, there is no this time it is different, there is no let's wait and see.

However, it is always said than done.  What I witnessed today is stunt reminder to how we evaluate risk.
Look at this screen capture.

The shares of Mosaic Co, a fertilizer manufacturer, droped USD$11.00!  Actually it dropped as much as USD$12.00 at market open.  $12 over a $50 stock, that's more than 20% drop!  In such a scenario, how do you handle your risk?  How do you handle your stop-loss?  Do you sell immediately suffering a large loss?  Do you hold to understand what has caused the sharp fall?  What will you do?  As an investor, you must prepare yourself for such an unexpected event, have a contingency plan ready before you enter the trade.

Remember:  Rule #1 of Investing is NEVER lose money.  Rule #2 is never forget Rule #1.

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