Always fix a protective stop when buying a stock

Recently, one of my client bought into a stock at about RM0.60. When the stock dropped below its purchase price, he decided to hold onto the stock. The stock then went into a non-stop slide and lost 60% of its value in just 11 trading sessions. The stock is Scomal (see the chart below).



Chart: Scomal's daily chart as at May 22 (courtesy of Tradesignum.com)

Here, I like to point out the most important rule of trading i.e. to fix your protective stop before buying any stock. The protective stop (known as a sell stop for long position) is not just a mental note. It must be implemented when the share price dipped below it. This will help to preserve our capital for the next trade.

If you search the internet for 'trailing stops', you will find many interesting articles on this subject. For those who want a simpler method, you may try a 10-day SMA. If your stock dropped below the 10-day SMA by a certain percentage (say, hit the 11- or 12-day SMA), then your sell stop would be triggered & you should proceed to sell off your stock.

You can do this quite easily by using Tradesignum.com's public chart (go to the link provided). Firstly, set the price overlays accordingly (eg. SMA for 10 days). Then, select your stock symbol. Finally, compare the closing price against the pre-determined SMA (see the cut-up below).



As our market goes higher & higher, the need to preserve our capital by cutting our losses earlier becomes even more important. So, learn to cut your losses early by setting protective stop.