Some Suggestions for Protecting Your Portfolio
Christina Nikolov

  • Do not invest money you can't afford to lose.

  • Do not place more than 10% of your portfolio into any one stock. Regardless of the market environment, allocating too much money towards one security or sector could have a devastating effect on your portfolio.

  • Never chase a stock as it moves higher. In other words, if you see a buy recommendation at $9 and the stock surges to $12 within a few days, you might want to consider waiting until there is some sort of a dip to a support level and then re-evaluate the situation. Nothing rises or falls in a straight line. If you exercise some patience, there is a possibility that you could eventually see your desired price. The only time you should sell into a decline is when a stock declines below a 'stop-loss' level. Since a stop-loss is set to protect capital, immediate action should be taken. Otherwise losses could compound.

  • Manage your position by either hedging with options or setting a stop-loss to limit downside risk. While there is always a possibility that the stock will turn back in your favor, there is no way to know if it ever will. With that in mind, once the value of a position declines by 20%, or whatever you deem appropriate, you must resign yourself to the fact that the trade is not working. Immediate action should be taken to cut your loss in the name of capital preservation. It's very important that you never fall in love with a stock.
    I can't even begin to count the number of times that cutting a loss saved me from a devastating loss. For example, in 2000 I bought InfoSpace (INSP) at $57. The very next day I sold it at $52, once a support level was broken and my loss limit was breached. The share price of INSP eventually fell 99% to under $1. Because of my quick action to protect my capital, I lost 9% instead of a whopping 99%.

  • Do not let others influence your decision process to the point where you will blindly follow their advice as mice followed the pied piper. Television commentators, radio financial advisors, stockbrokers and analysts all get paid to "put lipstick on pigs and sell them", so be careful before pursuing their recommendations.

  • Stock trading should be a non-emotional activity. If you utilize a specific investment strategy and it works, then stick with it. Please avoid trading when you are sick, upset, or overly tired, because you might have a hard time fighting your emotions.

"Winners have known losing."

-- Christina Nikolov, Founder ChartWatchCentral

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