The Need to Cut Your Losses in Stock Trading
Would it not be nice to find the ultimate trading method and system where profits are guaranteed and one never has to consider the notion of taking a loss, or when to take the loss? I submit that is more a dream than reality. In practice, stock traders will encounter losing trades – it becomes a question of how often these losses are encountered and the amount of loss on each occasion.
I would say a good trading method or system is one in which losses occur infrequently and that the system provides you good exit points thus establishing a clear price at which to take the loss. Even if you use a good trading system, by the measure just stated, it becomes a task for the trader to follow through with the action of taking the loss. It is as much a fight against one’s own emotions and psychology as it is anything else.
Also bear in mind that while your capital is tied up in a losing trade, you are not able to utilize that capital to make further trading gains. This is a double whammy in that you are losing to time as well as money (if the trend continues to go down, you lose even more money). I like to think that by taking the loss, I am freeing up my capital which can be used to tackle another trade.
The underlying premise is that you are using a good trading method (e.g. strategy plus discipline) and/or system (e.g. technical analysis with good trend following results) without which you will be faced with more stop-loss situations than you would like, which means your net trading result will likely be negative overall.
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