If there’s one thing you learn about successful investing it’s that picking the right stocks is not the most important part of it all.
This may seem a bit strange coming from me.
As the editor of the Oakes Momentum Report, I’ve spent over a decade refining a system to pick winning stocks.
But picking the right stocks at the right time is just part of the service I provide.
There’s another element which is far more important.
An element that most successful investors and traders I know have learned how to deal with successfully and they’re wealthier because of it.
Let’s get right to it...
My Best Advice For Investors Right Now
Don’t get me wrong, it sure helps picking more winners than losers.
But even if you do that, you may still lose money in stocks.
Because if you can’t manage to keep your losses small on stocks that go against you, then you will struggle to keep your head above water.
That’s why the most successful traders I know taught me to use what’s called a “stop-loss” order. If done right, all investors will have bigger gains and smaller losses with them.
I can tell you that with absolute confidence because they have worked tremendously well for me.
Once you understand how to use them, I’m confident you will get all the benefits.
A stop-loss order is type of trade which automatically sells a stock after it has declined to a certain preset level.
The most effective stop-loss orders are based on percentage price moves which gives stocks room to move up and down a bit as they rise.
For example, I’ll often set my stop-loss points anywhere between 5% and 20% depending on the volatility of the stock, position size, and how much capital I’m willing to risk in a single trade.
Let me walk you through one example to show how it really works and how I determine where to set my stop-loss points.
This is where a basic understanding of Technical Analysis (TA) comes into play.
One of the key elements of TA is finding a stock’s “support” level.
Support is without a doubt one of the most frequently used terms in TA circles.
The term refers to points on a stock where buyers have stepped in to support price on more than one occasion in the past.
But support must be proven multiple times.
So if a stock has dipped to and rebounded from a particular price point two times, that’s the support.
While rare, a stock can also touch down on a support area three or more times. We would call this “major support” as it has been tested several times without breaking down.
So what does this have to do with stop losses?
Well, the area technically just below this support zone is where you want to set your stop loss.
Placing a stop below support is ideal point because these orders give a stock room to move and allows it to bounce off support if it’s not going straight up.
It also protects you from the emotional bear traps when support is temporarily breached but quickly recovers.
With that said, let’s walk-through a real-world example to really drive all this home.
I’ll use an example from the Oakes Momentum Report portfolio and how we’re playing it for maximum profit and safety. I can’t reveal the stock because that’s for paying subscribers, but I can walk you through the trade to show you how all this works.
Let’s say the symbol is XYZ.
It’s trading at $52.45 showing strong support at the floor price floor of $50.
We decided to place our stop loss point just below the support at $48.50 because if it drops that level, the next support area is much lower.
The advantage of this set up is that your downside risk is greatly reduced in the event that the $50 per share support fails to hold and our stop is hit.
The result of the trade is in this instance would be a loss of only 7.5%.
Not ideal. But no one can pick winners all the time. The key here again is keeping losses small and manageable. At 7.5%, that’s small and manageable.
In this case, TA allowed us to use a higher stop-loss point because we know where the support level is.
Had we gone with a 10%, 15% or 20% stop we would have taken on additional losses that were completely unnecessary.
Got it yet?
If not, let me show you another example of a recent Oakes Momentum Report recommendation with a chart included.
The stock below was recommended to readers at $21.11 and had been in freefall for all of 2014.
The first thing I did was zoom out on a weekly chart and immediately locate the nearest “strong support” below.
I spotted four instances where price was respected and served as a pivot point, deflecting price like a bouncy ball that met a steel wall.
Those four points I’ve circled in green create horizontal support which I’ve drawn near $17.00 per share.
With price at $21.11 and support at $17.00, a stop loss needed to be established just a bit further below. In this case, I set it up near $16.40.
This would end in a 22.3% downside loss if our stop was hit.
On the other hand, upside potential called for the stock to eventually run to upper resistance near $33.00 per share, resulting in a gain of about 56%.
Given how strong support was, I felt confident that the risk to reward was very favorable.
Flash forward to today and I’ve been dead on…
In about two months’ time we’re sitting on gains over 10% in a very tough market and that’s just the beginning. The stock has only begun to break out and realize its upside potential.
That’s just one advantage of how Technical Analysis can be used to make you a much better investor. The difference between small and large losses is often the difference between a life of true financial freedom and one of worry and stress.