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Why you must cut your losers to get ahead trading

by , 26 May 2015

You've no doubt heard the stock market saying: Cut your losers, let your winners run.

Well this saying couldn't be more apt for traders. Hanging onto losing trades will only lead to disappointment.

So why is following the advice in this old stock market saying so important? And how can you apply it to your trading?

Read on to find out…

This saying is one of the hardest pieces of trading advice to follow

The fact of the matter is the vast majority of traders (and investors for that matter) find this an incredibly difficult piece of advice to follow.

The reasons behind this relate to the trading psychology at work. Cutting your losers and letting your winners run plays on your emotions of fear and of greed.

And don’t forget, when you trade geared instruments like contracts for difference and single stock futures, your losses can quickly mount up.

Let’s take a closer look at the first part of this saying…

Why it’s so difficult to cut your trading losses

At first glance, cutting your losers seems a very simple thing to do. But it’s not when it comes to applying it to your trading.

Imagine it playing out in real life:

  • You spend ages studying charts looking for your trading opportunity.
  • Your trading strategy finally highlights a potential profit making trade.
  • You finally pluck up the courage and put a trade on.
  • But then the trade performs in exactly the opposite way you thought it would.

The trade starts trending to your stop loss level. But for some reason, you can’t bear the thought of letting the trade hit this level, so you move your stop loss as you’re sure it’s just a matter of time before the trade starts to go your way.

By moving your stop loss, you’re just increasing your losses. And if the trade does start to recover, now it’s got to really perform to get you back to breakeven.

This is why it’s vital not to move your stop losses when you put a trade on. You should only ever move a stop loss to preserve profits, not increase your potential loss.

As a trader, you need to learn to take a few knocks along the way. No trader has a 100% success rate.

So there you have it. Why you must cut your losers to get ahead trading.

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Why you must cut your losers to get ahead trading
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