Always Cut Your Losses Short. Always.

I learnt this the hard way really. In my early trading days, I stuck too long in a stock that kept dropping. I had not exit plan, what I had was just hope that the stock will go up. It didn't. Since then, I set my rules right and always cut my losses short.

In my view, there are some important benefits why you should always apply cut loss.

#1. Admit it.. You are Losing the Trades. Move on.

This is about pride, isn't it? When the price keep dropping 5, 10, 15, 20 percent of your buying price, you may have this ego saying, "This can't be right! It will bounce up". The reality is that when what's left is HOPE, you should get out of the market and just admit you lost. Understand the 4 important emotions in trading.

#2. Boost Your Confidence. Really!

I can tell you that  the period when I was seeing my stocks were down 20-40% of the buying price was terrible. Sometimes I asked myself what I went wrong and started to doubt this whole trading thing. So avoid getting this feeling. Cut your losses short. Learn to set you mindset right. I believe this is also important.

#3. By Staying in Losing Trades, You are Losing Opportunity for Other Winners

When you are in the losing stocks too long, you are losing opportunity to move on to other stocks that could be a winner. It is the same principle with my other post on why you should not average down.

"Cutting losses is like having disaster insurance. By shielding your nest egg from devastating trades, you earn the privilege to invest again."

#4. Stocks Always Bounce Back, don't They?

Well, what I can tell you is that, I dare not to predict, and if I am in a position where I am losing my trade below my limit, what I know is that I am risking my capital for further losses and and should get out. Who cares if it will go up tomorrow, next week, or next month or never? Nobody knows really. Stick to your trading system and cut your losses short.