Cut Loss Mechanisms

This is a topic that is very much undiscussed because in reality, nobody likes to lose money on their trades. So what becomes of the trade if you do lose money? You naturally would have to stomach the loss and cut loss.

This is where the psychology of the trader must be strong. Warren Buffett's number 1 rule must apply! Capital preservation. If you are losing money on your trades, you should quickly cut loss and stay off the markets. The rule I always tell myself is that there are 51 more weeks to make money. Holding on to a losing trade might mean a total departure from the trading desk because the entire capital is now gone.

Nobody wants that and therefore an exit strategy is just as important as a strategy to make money. Knowing when to cut loss requires a longer term perspective to investing. The trader must know and acknowledge that trading is not a one time hit and run, it's a long journey of a thousand miles. And it is a learning process of knowing your limits.

For me I stick to a 4 times the premium that I sold for as a cut loss rule. That will limit my losses and I won't be crying buckets over the loss.