Maximum Acceptable Loss
Set the maximum loss that you are prepared to accept on any single trade. This is usually expressed as a percentage. Avoid trades where the difference between your entry level and the stop-loss exceeds the maximum acceptable loss.
Active or Reactive?
Many investors follow active strategies but end up being reactive, rotating in and out of stocks at the wrong time.
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Consider the following factors when determining your maximum acceptable loss:
- Whether you are investing or trading;
- The time frame that you are trading in;
- Whether you are trading on margin;
- Your overall risk profile; and
- Your level of diversification.
A long-term investor/trader with reasonable risk diversification may find 6%, or even 10%, an acceptable limit. A short-term trader may set a limit of only 2%.