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Managing Investment Risk with “Trailing Stop Loss” Orders

Managing Investment Risk with “Trailing Stop Loss” Orders

Managing Investment Risk with “Trailing Stop Loss” Orders

 

Closing the profitable positions too soon and regretting the missed opportunities, or getting greedy by keeping positions too long until the markets reverse turning the profits into unfortunate losses, is a well known phenomenon and one of the market analysts’ debatable subject. The situation gets more serious when the investor becomes a prisoner of his own losses.

 

Fear and greed have always been two predicted behaviors since markets begun. However, what confuses the analysts is the investor’s tolerance to the loss. Before analyzing this incredible patience, I invite the readers to consider this experiment which was performed to test the survival skills in tough situations, before surrendering to the situation given.

 

Proceeding with this experiment, scientists placed a frog in a bowl of water, and started to heat the water gradually. The frog felt warm and comfortable when the water reached 30 degrees. After the temperature increased to 40, the frog started to feel weak but insisted to stay in the bowl. The frog kept on enduring the rising temperature 60 degrees and more. Before the water reached its boiling temperature, the frog decided to jump. But it was too late to jump out as the frog became frail and unable to move, which led him a total loss.

 

What if the frog had certain limits to deal with difficult circumstances? What if the frog had gotten out of the hot water way before, and waited for the water to cool down to enjoy it again?

We often brag about our ability to endure and handle every situation, which in fact simply reflects our inability to admit the defeat until it is too late. This is how the speculator becomes an investor refusing to realize his losses, and the investor becomes a speculator trying to grab little profits while both are missing the market’s secret which is “Trailing Stop Loss” Orders. Isn’t it worth the thought?