Friday, August 15, 2008

Keeping Losses Small

Keeping your losses small is a very important part of trading. Small losses can easily be overcome by large winners. However many traders gain let their losses run wild.

Too many traders will not exit there trades when they start to turn against them. They will hold onto their stocks and hope it turns around. They might even turn this short term trade into a long term trade. Bad idea, if you enter a trade as a short term deal you cannot switch it to be a long term trade all of a sudden. That mistake can be the death of most traders.

There are many reasons why cutting your losses short can be a great idea.

1. Everybody is wrong sometimes. I have never met a trader who is right 100% of the time. It is better to have small losses then have large losses when you are wrong.

2. Small losses can be easily overcome. If you keep your losses small they can easily be overcome by your winners. One large winner can easily offset several small losses.

3. Taking small losses lets me sleep at night. If I take small losses I quickly forget about it and move onto the next trade. If I don’t cut my losses short they can add up and make me worry. How many times have you seen a stock head against you and you decide to hold onto the position, only to end up regretting that decision later on? Letting your losses run can be hard on you mentally so why let it happen?

4. Taking small losses let me come back. If I only lose 2% of my account on 1 bad trade it doesn’t hurt me that much and lets me come back. However if I lose 50% of my account on 1 bad trade it is going to be hard to come back.

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