Investor's Corner: If All Else Fails, Cut Losses To 7%-8% Of Your Stock's Purcha

But sometimes one can get caught in a downdraft. Maybe you missed the sell signals, or maybe there weren't any.

You'll avoid serious trouble if you cut your losses to 7% or 8% below your purchase price.

You can be even more prudent when the market, or just your stock, suffers a series of high-volume declines. In that case, why wait for that 8% loss? Cut out sooner.

When you do that, you won't get emotionally burned and scared off the next time the market is rallying.

But if you ignore the 7%-8% sell rule, your losses can pile up fast. You may be hesitant to buy into the next rally. And you'll have less capital to buy with.

Sitting on heavy losses is a dangerous strategy: You may hope that the stocks will come back, but this is not always the case. And hoping is not a wise financial plan.

When a stock falls, you have no idea how low it will go. Why risk it all, just to be wiped out by one bad stock? Proper selling discipline sets the stage for the next winner. Otherwise, your portfolio will be a collection of losers.

China Medical (NasdaqGS: - ) came public in August '05 and quickly hit an all-time high in February '06 (point 1). There were just two chances for investors to get into the stock: at the end of September (point 2) and in November 3.

Buying after the two heavy-volume sell-offs (point 4) in November and early December was not a good strategy. While the stock still had room on the upside, it was plagued by poor price-volume action.

China Medical confirmed those problems in the week ended Feb. 10, 2006 (point 5), when it fell below its 10-week moving average.

If you didn't take those hints, hopefully you limited your losses to 8%. Otherwise, you'd have sat through a plunge to 18.30 in late June '06.

If you held on, you would have accumulated unnecessary losses. You'd have missed big moves from scores of other big winners, too.