Stick to your stop losses! It’s better to risk the chance of giving up potential profits than to risk a more probable chance of losing money! Many experienced investors often fall into the trap where they move their stop loss orders lower, believing that the fall in market prices is only a temporary fall, and things will get better.
So why did you lower your stop loss order in the first place?
You bought at the wrong time, and now the investment is going against you. This happens to literally everyone. But what you decide to do is to move your stop loss order, that way the declining price will not hit your stop loss order. Every time the market moves lower, you lower your stop loss order. You’re thinking “my analysis of this investment was right, this is only a temporary drop in the market, and I’ll simply wait until things are going my way.” This kind of thinking and action usually results in LOSING MONEY.
Or, you may simply be afraid to admit that you’re wrong. People hate to admit that they’re wrong. Investors hate to admit that they made the wrong investment decision. But do you want to stand by your arrogance, or do you want to avoid losing money?
How to avoid moving your stop loss order.
If you’re experiencing this kind of a dilemma, consider asking yourself “why did I create a stop loss order in the first place?” To avoid losing more money when the investment / trade goes against you. To cut your losses when the market goes against you.
Most of the time, if the investment has been going against you for a while (a few weeks), that means that you’re wrong. Your position is terrible, and it’s time to listen to your stop loss orders and cut your losses. But you probably don’t want to do so, because there still is a chance that your investment will work out. Don’t do that! It’s better to cut a 60% chance of losing money than to hold onto an investment that has a 40% chance of losing money. Afterall, if you’re down 50%, you’re going to need a 100% investment gain to make that money back.
Point is, listen to your stop loss orders.