Deadly Sins of Trading: Failing to Cut Losses Short


One of the most frequently asked questions by any aspiring traders: “What is the most frequently committed error by aspiring traders?” My answer: Failure to accept and take losses quickly.

Every loss is like a cancer that has the potential to spread all over your account and destroy your entire financial life. Therefore, in order to ensure longevity in the trading journey, traders must quickly rid themselves off this cancer whenever it rears its ugly head. Each loss usually starts off small. That’s when controlling it, or completely cutting it out, causing little or no pain. The major problem for traders arises when they allow the loss or cancer to spread.

Each time a stock is allowed to make deeper inroads into negativity territory, the traders and their ability to act become weaker.

I believe that traders’ most previous commodity is their original capital, and that they are doomed to utter failure if they do not do everything in their power to prevent its erosion. Taking fast, but small losses is the only approach and tool, that traders have to to help ensure that. But not only must traders be willing to take quick but controllable losses, they must accept the fact that losses are, and will always be, part and parcel of a trader’s journey. This is perhaps the most singularly difficult fact to grasp for novice traders. Most struggling traders spend their entire trading lives attempting to run away from losses. They perpetually move from broker to broker, service to service, trading system to trading system, hoping, praying, dying to find the “holy grail,” that perfect approach that will deliver juicy, unbelievable mouthwatering profits without even a trace of a loss.

In a word, that’s impossible. Why?

Because successful trading, like successful business, is determined by how well we managed our losses, not by how well we avoid them. If you truly desire to become an astute trader, learning how to lose professionally, by keeping losses small, is the master key. That is the skill we need, that is the way to big bucks, and that is what will deliver longevity in the trading business. Take care of your losses by keeping them small, and I assure you that the winners will take care of themselves.

How to Eliminate the Sin of Failing to Cut Losses Short

The following steps will help prevent you from falling prey to the deadliest enemy of all – failure to cut losses:

  1. Never place a trade without a predefined stop loss. Taking a trade without determining the price at which you will exit within your risk control is like racing down a steep hill at stop speed without any brakes.
  2. Always adhere to your predetermined stop loss. This should go without being said, but so few aspiring traders are able to muster up enough discipline to do this. Why is this so hard to do? Because selling your stock at stop is clearly admitting that you are wrong. The action does not bring about warm feelings of pride, nor does it boost one’s confidence. But the true astute traders have come to learned to overcome theses difficulties. They have become experts at taking their stops with blinding speed. They have done this because they’ve developed an intolerance for stock that are not working for them, and kill them at the first sign of trouble.
  3. If you are having a tough time adhering to your stops, start off by getting into the habit of selling half of your position. Becoming discipline enough to religiously cut losses takes time. Placing and adhering to stop deal with the art of taking a loss, which is why they are so often approached with the reluctance and dealt with from a basis of pain. This alternative action is much easier to do, as it tends to please both duelling impulses: (a) the impulse to get rid of the failing stock and (b) the impulse to give it a chance to come back. By cutting the problem in half, the traders often gain a greater clarity and mental focus.

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