Holding a poorly performing stock in the hope it will recover inevitably leads to higher losses. Selling when the price starts to fall is a basic concept that may seem obvious, but few amateurs have the discipline to do it. Professional investors on the other hand will follow this rule religiously.

To take the guess work out of when to sell, a trader will have a stop loss in place. Put simply, a stop loss is the amount of money that you are willing to lose if your decision does not prove to be profitable. When asking yourself this question, it will be useful to use 10% as a good starting point. If you set it at 1 or 2%, you will find that you will exit too quickly, as prices frequently come down a little before continuing an uptrend. If you set it to 20%, then you are risking 1/5th of your capital on this trade if it trends against you. This is why 10% is recommended as the starting point.

The stop loss should be calculated from the price paid and then follow the highest closing price reached since purchase. Once the stock has fallen 10% from this value, it is a Sell signal.

If you purchase a share at $1.00, then 10% of $1.00 is $0.10. This means that you will sell the share if it falls by $0.10 to $0.90. When the share rises in value, you then take the stop loss from the highest price reached since purchase. The share rises to $1.50. 10% of $1.50 is $0.15. This means that you would sell the share if it fell by $0.15 from $1.50 to $1.35.

To help understand this, let’s look at two examples.

This stock reached a low price of around $5.56. Since that date to the end of the chart it has grown around 30% in value and may have come to your attention. As you have already learnt, the price will have to break through the resistance point (high point on the left of the chart) if it is to continue on its upward trend. You should put a high warning alarm on this peak, and only consider buying if it breaks through this resistance. If you ignored this and purchased the stock, this is what would have happened.

This stock was unable to break that higher price and fell strongly to the low $5.00 range. If you purchased at around $7.40, then the 10% sell point is around $6.66. Ignoring this results in a 25% loss. Selling at the stop loss reduces a significant loss to an acceptable margin.

If a share starts rising in value, then soon the stop loss becomes a profit protector. The worst case for a trader is to get greedy. This can occur when a stock rises strongly in value then falls. Greed in this instance takes over, expecting the price to continue rising. But often the amateur trader is left with a share price close to that they started with, or worse, a loss.

This stock rose in value from around $9.00 to nearly $13. During the distribution phase there were many points where the share price had fallen by more than 10% from the previous high. If these events were ignored, then the price eventually fell back to near $9.30, wiping out the majority of any recent gains. Selling at $11.65 would have locked in at least a respectable profit.
The stop loss in the IntegraStock software is a floating stop loss. This means that the level from which the 10% stop point is calculated from floats with an increasing closing price. So at $1.00, then the stop loss is $0.90. However, if the price rises to $1.50, the new stop loss of $1.35 (or $1.50 minus 10%) is automatically calculated for you. A floating stop loss will be brought to your attention in the Portfolio Summary page when you first log in.