For the last couple of down days, I've learned there were some trader/investor out there that could not cut their losses and therefore, watched the small losses turned into BIG losses.
I like to share my 2 cents here and talk a little bit about how I come to resolve this dilemma. The inability to cut my losses quickly had been my worst enemy since the first day I started trading. Although I had read many books on trading that always reminded me to cut my losses quickly, it was a completely different situation when you were faced with an actual loss. My emotions suddenly took over and I was frozen like a deer facing the headlight. No matter what I told myself about cutting losses, my fear (or was that stubbornness?) just dominated me. And to make matter worse, those "frozen deer" (aka as "indecision" due to emotional turmoil) moments took away those precious opportunity windows to take loss quickly. Afterward, the larger losses you saw would make it even more difficult to cut your loss. This had been going on for as long as I could remember until I discovered a trick I played on myself.
Before I discussed my trick, I like to discuss a principle that I learned from self-help books I read. Well, many of these books I read discussed how we could visualize what we want to become and our mind would believe what we visualize. Interesting concept except that a lot of time it didn't work. Then it drawn on me that discipline played an important role in this as well. It was when we took a half-a** attitude toward this exercise that we found our wanting was not being met. But there were those who strongly believe in this visualizing concept. And I learned that these people took a very diligent and committed approach to this exercise. So, this is the "key" to a successful visualization- commitment to discipline (sound familiar?).
My point here is that the mind can be tricked by controlling our own thought process, in this case- our visualization. Once the mind is tricked, it may avoid the usual automatic emotional responses that come with our mind reacting to a particular stimulus- like seeing our trade turning into a loss.
Working with these visualizing principles, I began to modify it to fit an approach that would help me cut my loss. Whenever I was faced with a loss, I told myself that "I'm going to short this bastard and buy it back cheap!" Of course, I was not really shorting the stock but simply to sell what I already owned; but my mind, somehow, like the idea of buying back the stock cheap! In a way, my mind was not "wrong" about the trade but love the idea of a bargain later on. After awhile, I just simply told my mind that I was going to sell now so I could buy back cheap, my mind just gave me the go ahead and stopped the dreaded emotion from attacking me. Now, whether you are actually going to buy it back cheap later on is another matter entirely. Your mind only need to know that possibility is there. Easier said than done.
But with practice, it actually works for me. Put it this way, what I discovered was just a technique to help me cut loss. But with any technique, just by knowing it would not help. Think of a martial art student who only learned the art of blocking a straight punch from reading a book. And when he finally faces a real punch going his way, what do you think he is going to experience? Yeap, FEAR of getting hit! However, those who practice the actual blocking with a sparing partner was able to execute the block without letting FEAR get in the way. Successful martial artists always paid the price of getting bruised. And from these "bruises", they learned to transcend the experience into a true and sincere respect for those particular blocks. Those blocks, eventually, become part of his/her successful automatic blocking repertoire.
And so is it with "cutting losses". The most important thing is that we find a technique to help us sell our losers quickly. In my case, I used the technique of imagining that I'm actually selling it now to buy it back cheap (or imaging shorting the falling stock). With practice, I began to appreciate the wisdom of cutting losses quickly. These experiences would eventually transcend itself into a part of successful trading repertoire. It is from the bad experience of not cutting losses and then the appreciation of what cutting losses quickly could do for you that the cliché of "cut losses quickly and let profit ride" become such a powerful truism.
Knowing the cliché of "cutting loss" without actually working hard to exercise a technique to cut losses is like putting a plastic mask on your face and watches the punch coming at your face. Needless to say, your mask would be broken and your nose as well.
Here is another visualizing technique that I used to help me cut my losses especially when I was loaded up on the stock. I imagined the stock I bought as a massive delivering truck. My job is to follow the truck and let it guides my way. And when suddenly the truck changed direction and headed my way, what do I do? Imagine a truck is heading YOUR way! What would you do? GET OUT OF THE WAY!!!!
I sold and sold until all my shares were sold!
Did I get my point across?
Disclaimer: Of course, all of the above is my opinion only. I am NOT a psychologist and therefore cannot and will not guarantee the above tricks I used will work for you. The important thing is that YOU must find your own technique to help you cut your loss. Otherwise, the symptom of a "frozen deer" could become an unwanted emotion that you don't want to have at the most critical time during your trade.
Btw: While cutting losses is a very important part of a successful trading strategy, by itself it does not necessary guarantee overall successful trading. For you could be whipsaw to death in a choppy market. Learning how to read the market is also an important part of a trading strategy as well. This will be the area that Rande Is excels. And to do that, you need to be patience when you trade. Remember, when you make it OK to miss a trade, no matter how successful that trade turned out to be on hindsight, patience becomes easier.
Ps. Rande Is, this post is not directed at you but simply because you're the last post here for me to respond. I'm aware that you and many traders here have already mastered the art of cutting losses. I hope the sharing of my experience may help those who are still struggling with the issue of cutting loss.
Good trading to all. |
