Have you ever thought about “Rule #1: Cut Losses Quickly”?
I do not mean using it as an axiom (which of course everyone should do) but proving it for yourself as a theorem.
If someone is asked “Why should you Cut Losses Quickly?” the first and most obvious answer will be “Because you will lose less money.”
But let’s have a look a little deeper. What else will you receive by cutting losses quickly (even if sometimes it is too quick).
You will not only avoid unnecessary loses but (and what can be even more important) you will release more money for other trades. Imagine you purchased some stock for $1000 and it dropped 10%. If you cut your losses here you will lose $100 - not very pleasant of course, but quite acceptable. But what happens if you don’t? For example, you hope that after some time it will at least return to original price. In this case you may save your $100 (but more likely you will lose more if you trade penny stocks), but even if you save those $100 or even make some profit on this stock over time, you will lose all potential profits you could make trading those $900 which you willingly put away from your pocket and put in a locked drawer. And it could be $100, $200, $300 or bigger amount depending on for how long you are going to hope and keep your position open.
But even this is not the worst point. The worst one is that when you stuck with some open position hoping to still make profit of it or at least to decrease losses it will take away your attention from actually valuable trades. Whether you like it or not, you will check the situation on a stuck stock - during a day, a week, a month... you will think what is the best moment to rid of it, moreover, you will be demotivated with this situation, especially if each day price continues to go down. As result you will miss really good trades which could easily cover the losses if you just catch them on time.
Thus “Cut Losses Quickly” - it is not only about losses. It is much more about potential profits. Next time when you have doubts try to think about this rule from profits point of view.
P.S. Sorry for my not perfect English and if I used some terms in a wrong way - I’m still a newbie here.
Posted Mar 08, 24 11:09 PMbyveloraven
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