Profit and Loss Plan Review

PROFIT EXIT STRATEGY AND STOP LOSS RULE are among the most important components of Marginal Stock Trader's updated online stock trading plan. Professional traders admit that deciding on a "set of limits that determines the maximum loss or gain an investor will take on a stock", says Investopedia, is basic to stock trading to prevent excessive losses or to lock in profits. This is where our Profit/Loss Plan comes in handy.

Profit target
Our online stock trading plan has this profit exit strategy: simply add 35 pesos to our entry price, and exit the trade as soon as prices move up 35 pesos. We shall tweak this strategy a little bit by creating a more general decision criteria. We shall set the maximum gain we will accept at 12% above the price at which we bought the stock. Our goal is to lock in profits at this point.

Stop loss rule
In this rule, we aim to avoid mounting losses from holding on to a falling stock hoping for a rebound. Here, Marginal Stock Trader lists three options:

• First option, based on our updated Online Stock Trading Plan is a fixed peso amount: simply subtract 12.50 pesos from our entry price , and exit the trade as soon as prices move down 12.50 pesos.
  
• Second, percentage of our entry price: we shall set the maximum loss we will tolerate for our position at 5% below our entry price.
  
• Third option, percentage of Minor Bottom. This stop loss rule was briefly described in the article Stop-loss: Add science to the art of using stoploss by Jayesh Patel. As of June 30, 2009, we have identified a Minor Bottom at 250 pesos. We exit the trade as soon as price hits 5% below this level at 237.50 pesos.

Marginal Stock Trader has no prefererence over any one of these three options. But let us look at his latest trade. He decided to exit at 265 pesos his long position in Ayala Corporation -- bought at an average price of 299 pesos -- with expectation of this stock going down further. We will be satisfied to buy the stock at 237.50 or lower.

In the event that the stock moves up, contrary to our initial expectation, we shall buy the stock at 5% above our last selling price preventing additional losses. Hence, we shall purchase the stock if the price moves up 12.50 pesos.

Carrying out the plan
Our plan has a double requirement: we have to sell our stocks (1) if they fall to a certain level and (2) if they rise to a certain level. This plan must be implemented strictly or we expose our trading capital to more risk than what we might want to take.

Related Posts:
Lessons in Losing Money
Accumulating Shares of Ayala Corporation
Long Position in Ayala Corporation