Set a ‘sell’ and ‘stop loss’ price
After a new purchase, draw a defensive sell line in red on a daily or weekly graph at the precise price level at which you will sell and cut your loss (8% or less below your buy point). In some instances, the sell line may be raised, but kept below the low of the first normal correction after your initial purchase. If you raise your loss-cutting sell point, don’t move it up too close to the current price. This will keep you from exiting during any normal weakness.
You shouldn’t continue to follow a stock up by raising stop-loss orders because you will be forced to sell near the low of an inevitable, natural correction. Once your stock is 15% or more above your purchase price, you can begin to concentrate on the price where or under what rules you will sell it on the way up to nail down your profit.
Any stock that rises close to 20% should never be allowed to drop back into the loss column. If you buy a stock at Rs 50 and it shoots up to Rs 60 (+20%) or more, even if you don’t take the profit when you have it, there’s no intelligent reason to ever let the stock drop all the way back to Rs 50 or below and create a loss.
If you’ve already made the mistake of not taking your profit, avoid making a second mistake by letting it develop into a loss. Remember, one important objective is to keep all your losses as small as possible.