Become a master at cutting losses with these 3 simple principles:
1. Plan Out Your Trades Prior to taking them- Traders who are highly successful all have one thing in common. This common thread is that they have a plan for every trade before entering the trade. It may not be written down on paper or typed in a spreadsheet, but it certainly exists. Having a plan allows you to reduce the effects of emotions during a trade, and following your plan keeps you from making disastrous mistakes. For your plan to be effective, it helps to include a strategy for your entry, exit, and stop loss (also known as the price where you will sell if the trade isn’t going your way). Many stock brokers and stock chart providers have drawing tools that you can use to draw out your plan directly on the chart, and others have plan visualization tools that save you the time of drawing out your trade plan.
2. Don’t Dwell on It- Trading psychology is key to the success of any trader, which is why it’s important not to dwell on trades that didn’t go your way. Contrary to what many try to teach, there’s no magic formula that will make you win 100% of your trades and you can’t apply rigid rules to the stock market. There’s no amount of knowledge that will give you a perfect win rate either, so work on understanding that losses are a part of the game. A commonly noted statistic in the trading world is that successful traders have a slightly better than 50%-win rate, which means they frequently have trades go against them. Next time you lose a trade, learn from it and move on unaffected.
3. NEVER BAG HOLD- The reason that many successful traders are profitable with a win rate just over 50% is because their winning trades are much larger than their losing trades. Consequently, what they don’t do is bag hold, which refers to holding onto a position after it has gone below your stop loss level in the hopes that it will recover. Bag holding is a quick way to blow your account or quit trading altogether, so don’t do it!