Devising Your Plan
Devising a plan may be more difficult than you'd expect. First, you'll need to set the maximum gain you will accept and the maximum loss you will tolerate for your investments, but these maximums and minimums shouldn't necessarily be the same for every stock. For example, a blue chip stock is more unlikely to rise or fall by 10% within any given year, as compared to a small-cap growth stock, which will exhibit more volatility. In other words, you must analyze each stock individually to estimate how much it is likely to move in either direction.
Some investors use technical or fundamental analysis or a combination of both to determine appropriate limits for gains and losses.
Another way to devise your limits is by modeling your plan on the performance of a designated benchmark, such as an index or even on the past performance of your own portfolio.
Another factor you must consider when devising your profit/loss plan is your risk tolerance, which depends on many factors, such as your personality, your time frame and your available capital. Typically, people who are risk averse will have tighter boundaries than those who don't mind risk. Risk lovers will try to profit as much as possible from a rising stock, but a more conservative investor may sell the stock early on in its rise to eliminate the risk of losses, which would occur if the stock took a quick downward dive. If you prefer to shy away from risks, a profit/loss plan of 10% each way may not be suitable or even realistic for you.
On the other hand, if you are willing to take on the added risks associated with potential profits, then a 10% profit/loss might be more appropriate.
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