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Why you must stick to your stop losses

by , 13 August 2015

Stop losses are an essential part of risk management and should form part of your investment strategy.

The key to using stop losses is adhering to them. There's no point using stop losses then never selling if the share price hits them.

So why is it so important to stick to your stop losses?

Read on to find out…

The point of using stop losses

Whether you use fixed stop losses or trailing stop losses on your positions, it’s vital you stick to them. Don’t try to reason with yourself why you shouldn’t sell if one of your shares triggers its stop loss.

This is why to use stop losses efficiently, you must have discipline.

The primary purpose of using stop losses is to minimise your losses, Peter Churchouse in Daily Wealth explains. Investments are risky so you must manage losses.

Why you use stop losses

By using stop losses, you prevent large losses having a major impact on your portfolio.

If a share you own hits its stop loss, you must sell. This immediately eliminates any further losses from the position.

Just because you sell out of a position now because it hit its stop loss doesn’t mean you can’t buy into the same share again in the future.

By selling, you can analyse the situation and make a much better call on whether there’s an opportunity in the share further down the road.

By not acting on your stop losses, you allow a small loss to potentially grow into a large one. You don’t know what the future holds. The share may fall much further than you think.

And by selling out of positions when they hit their stop losses, you free up cash to invest in new opportunities.

So there you have it. Why you must stick to your stop losses.

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Why you must stick to your stop losses
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