By Chuck LeBeau, director of quantitative analysis at SmartStops.net.
We cannot force or control gains but we do have control over losses. Consider Coca-Cola (KO - Get Report), whose shares are currently trading above $44 after rallying more than $3 on news that overseas sales were higher than expected.
How high will Coca Cola shares go in the next month or two or in the next year or two? Although we might be optimistic and expect the stock to move generally higher based on big sales increases in China and India, we have no influence or control over how much a stock moves in our favor.
However, if we decided to buy Coke shares at this level, could we make sure we did not own the stock if it dropped to $30? Yes, because we can use exit strategies that protect us against loss.We can safely hold Coke until it drops to $39.66, where it might be in trouble and decline further, according to analysis by SmartStops. Armed with this valuable information we know that we can buy or hold Coke shares and easily limit our risk to about $5 per share. We have much more control over losses than most investors are aware. Investors tend to focus on the future profitability of an investment without devoting enough attention on protecting against big losses. Preventing big losses is something that we can absolutely control and we need to learn to do that using the best tools available. If we decided to act based on the good news this week, knowing how much our risk might be would help us to make a prudent and informed decision about how many shares we might want to buy and that is another form of loss control.