Three Ways to Take Risk Out of the Stock Market

Using these three simple steps, you can reduce the risk in your stock picking plan:

1. Screen Your Picks. This might seem obvious, but patterns that look like they are developing into predictable trends do not always follow through. 

2. Get In. Get Out. Set realistic target exit prices for all stocks. Lock in high returns while the stock is high, and  get out before the market has a chance to change its mind. With Swing trades, this means taking profits from one part of the trend. As soon as the first pullback occurs, we get out and wait for a reentry point.

3. Set Tight Stop Losses. This step is absolutely critical to minimizing your risk in the stock market. If a sure-fire winner turns out to be a fizzled-out dud, your system needs to have a built-in, abandon-ship trigger. That is, you need to know when to cut your losses and move on to brighter prospects.

A stop-loss trigger around 3% is realistic for all but the most volatile stocks. So if a trade starts to go sour, you will almost never lose more than 3% of your investment.

These tips came from ChartAdvisor.com and were modified to suit the NeuroTrade trading strategy.

S stopped out $3.80

This was a rough ride and very unpleasant. First I got in too quickly based on my entry flowchart for stock reversals, without letting this reversal develop into a true breakout.

Then I didn't have a stop loss in (first rule of trading, limit your losses). The price recovered, and I should have got out even. But I didn't, I was confident it would turn around. But it didn't turn around, and now with my stop loss in, I was stopped out at my 5% stop loss at $3.80 on 12/3. The day after, it was back up 5% in a single day to over $4.

Now it's at $4.17. Should I get back in? I'm almost done with second guessing this volatile little bugger.  I'm going to let a clear trend develop, as I think the company has potential and should benefit from all this frantic buying of smartphones as Christmas presents.

NOKIA dividend paid after I sold this position at a loss

Cruel irony. After my lesson about 'holding your breath until your stop loss is in' and deciding to bite the bullet on my ill conceived NOKIA trade, I got a very reasonable dividend cheque. Mitigated the loss slightly. Would have actually covered the stop loss if I had had it in.

Actually, I thinking about buying NOK again after seeing this article. That's the thing about taking a loss. You can always buy the stock again if the technical indicators are good, and admitting you were wrong about a trade gets rid of the emotion of holding a losing position.