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Capital Preservation First

Investment Technique

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You should always focus on capital preservation in situations where you are highly susceptible to capital loss. The focus of the strategy presented is entirely centered on seeking out situations that result in gains while focusing on capital preservation, or minimizing the chances loss will occur. By preserving capital, you limit your losses and allow your gains per trade to outweigh your losses per trade.

Adjust Your Portfolio

You can avoid large amounts of capital loss by re-organizing your portfolio every so often. Over time, as certain investments grow at faster rates than others, they begin to take up higher percentages of a portfolio. You will need to trim the percentages that successful assets take up within your portfolio. Over five percent of your portfolio is generally a danger zone. When an asset above twenty percent of your portfolio suffers a price crash, you will suffer increased amount of capital loss. It is better to trim back the holdings and buy other investments than to allow the growth to continue. It is especially important to trim assets that have shown successful growth with high volatility if they have large amounts of capital.

Stop Losses

You can also protect yourself by utilizing stop loss orders to cut off potential capital losses. By occasionally updating stop loss orders in relation to gains you can prevent large losses from destroying your investments. If you are using this strategy, you will want to place the stop loss between eighty-five and ninety-five percent of the market price and update it often. If the share’s market price is increasing, this range will eventually move above your purchase price. When your stop-loss is above the principal, you have locked in your principal, and begin locking in your gains. At this point, you move from capital preservation to capital protection. Depending on the placement of your stop-loss order, you can avert massive disaster in the portfolio using this strategy.

Reward to Risk

You also automatically increase your reward to risk. The reward is the amount of money you gain from each trade, while risk is the amount you can potentially lose. When you divide reward by risk you get a ratio called reward to risk. The higher the average reward to risk number is, the more likely you are to have long term growth if you have accurate investments. If your stop losses are too close, you may get taken out of investments early and lose capital, so be reasonable about your capital preservation strategies and allow each investment some room to fluctuate.

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