Keeping stock losses small

Keeping your stock losses small is a very important part of trading. Small losses can easily be overcome by larger winners. However many traders will let their losses run out of control.



Too many traders will not exit there trades once they start to turn against them. They will hold onto their stocks that go south and hope it turns around. They might even turn this short term trade into a long term trade. Bad idea! If you enter a trade as a short term deal you should not switch it to be a long term trade all of a sudden. That mistake can be the death of a trader.

There are several reasons why cutting your stock losses short can be a great thing.

1. Everybody is wrong sooner or later. I have never met a trader who is right 100% of the time, or anyone for that matter. Everyone will be wrong it is important to keep your losses small in that situation.

2. Small losses can be easily overcome by winning trades. If you keep your losses small they can easily be overcome by your winners. One large winner can easily offset several small losses.

3. Taking small losses lets me sleep at night. If I take small losses I quickly forget about it and move onto the next trade. If I don’t cut my losses short they can get bigger and make me worry. How many times have you seen a stock head against you and you decide to hold onto the position, only to end up regretting that decision later on? Letting your losses run can be hard on you mentally so why let it happen?

4. Taking small losses lets me come back. If I only lose 2% of my account on 1 bad trade it doesn’t hurt me that much and it lets me come back. However if I lose 50% of my account on 1 bad trade it is going to be very hard to come back.