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Why It’s So Difficult To Cut Your Trading Losses

For most traders, there’s nothing more frustrating than experiencing a trading loss. As a result of this, some traders will procrastinate booking a loss until the pain of the loss become so great that they have no choice but to do so. We will go over some of the reasons why cutting your losses in the market is so difficult to do, and provide some tips to help you manage your losses better.

What Does It Mean To Cut Losses Quickly?

One of the most popular axioms in RC Contemporary is as follows – Let your winners run and cut your losers. If you have been touring the market for any length of time, you must have heard of this axiom. But what exactly does it mean to shorten your losses? Well, cutting your trading losses means you have to close a relatively small loss position before it has a chance to turn into an unexpectedly large loss. It's that simple. However, while the theory is relatively simple to understand, it can sometimes be very difficult to implement.

The reason that cutting a losing position quickly is paramount, is because it is a critical component to protecting your trading account. And so, if you do not have a solid risk management plan that includes within it how you will be managing your losing positions, and when it’s time to throw in the towel, you can run into a situation that may compromise your trading account. The sooner that you realize this as a trader, the better off you will be in the long run.

Most successful traders seek out asymmetrical reward to risk trading opportunities. That is to say that they are looking for set ups that provide them with many more units of reward per unit of risk. More specifically, that may translate into reward to risk ratio of 2 to 1, 3 to 1, or higher. As such, these more experienced traders in the market have come to realize that losing trades are just the cost of doing business. It’s a necessary business expense that must be incurred in order to achieve their expected edge over a long series of trades.

Many amateurs traders on the other hand have a difficult time with cutting their losses short. There are many psychological reasons for this, which will be getting into soon. But, for now, you must have a clear understanding of what it actually means to cut a loser short. And again, that is to say that you must have some mechanism in place to close out a losing position before it can balloon to a point where it becomes lopsided from the reward to risk profile or in a worst-case scenario, becomes completely unmanageable.

Reasons Why Traders Delay Cutting Losses

There are a number of reasons why traders find it difficult to cut their losses even when they know naturally that it is the right thing to do in certain situations. This deficiency often stems from our psychological and social environmental factors which ingrain in us certain ideas about right and wrong. Let's take a look at some of the main factors that prevent traders from losing their trading positions.

Do The Right Thing – From an early age, we have been taught to do the right thing, and avoid doing the wrong thing. Most of what we know to be right and wrong is instilled within us by the time we are in elementary school. As we move into our teenage years, and early adulthood, we strive to do the right thing so that we can fit within societal norms. We are told to study hard, get good grades, get a college degree, find a suitable job, get married, and have two and a half kids, and so on and so on.

Now, if we decide to enter into the trading arena, a lot of what we have learned through the years will be counter to what it takes to become successful in the markets. More specifically, when it comes to trading, we will often be wrong more times than we will be right. This characteristic is difficult for many people adjust to. As such, they will tend to do whatever it takes to avoid being proved wrong in the market. This in turn can lead to holding onto losing positions for much longer than they should.

Expecting Things to Turn Around – When asked whether the glass is half full or half empty, those who answer that the glass is half full are often identified as positive outlook type individuals. On the other hand, those who answered that the glass was half empty were often categorized as individuals with negative views. In Beauty Tips, hope and optimism are more admirable traits than fear and pessimism. What does this have to do with cutting losses, you may ask? Well, again, everything we do in the marketplace stems from our personal beliefs and interactions in society.

And so in this case, hope rains eternal in the eyes of a trader holding a losing position. Isn’t it better to stay positive and optimistic and hope that a losing position turns around? Isn’t that what we might do in most other social settings outside of the markets? This again, is completely counterproductive to our efforts in the markets.

That is to say, in the markets, hope is not a strategy, and it will more likely lead us to the poor house. In the markets, it’s usually those individuals that have a near obsession with risk and loss that are more likely to survive and thrive for the long-term.



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