I’ve been always wondering how to cut losses, I know I should do what the market tells me to do, I’m not looking for that kind of answers. Here is the scenario:
Assume I buy reversal according to oversold and a few other indicators (or other trading strategies), I had a good setup and entered a long position, but the price continued dropping and my loss had reached my maximum loss per trade, I should close my position according to my trading rules. But, on the other hand, it’s more oversold and I have a even better setup, I should buy more instead of cutting losses. This is a dilemma.
What do you do and why?
Well there will be many answers to this questions including some harsh one which you do not want to listen (believe me i have heard them, Not good..). But here are a few informative one
1). I think you should stick to your rules and cut your losses…but learn as much as you can about reentering to catch that eventual reversal. Markets can decline far more than anticipated…you don’t want big losses! Many will say your crazy for trying to pick a bottom…those traders will be the trend followers. It sounds like your best bet is to follow a good plan of cut your losses and maximize your gains…so, cut those losses!
FYI…Hardly 5% trade like any of the above but hey who i am kidding. They are those who make money.
2) It’s good that you set a max loss per trade. I would sell at my sell signal or stop loss and move on. No sense crying over it…. Just move on to the next trade. Just because something is oversold does not mean it will revert to the mean or reverse. If it’s a strong down trend it can remain oversold for a long time. And if you think the market HAS to revert because it SOOOO OVERSOLD and it just CANT stay this oversold that long then that too is poor thought process. The markets can remain irrational a lot longer than you can remain solvent. Don’t try to argue with the market or believe you can control the market or even understand the market. Just follow what it is telling you. No matter how irrational it may seem.
I think it’s good that you have determined a max amount of loss per trade but I can’t say whether you have chosen an appropriate stop loss. You could have a stop $0.10 away and have 10,000 shares which represents a $1000 max loss or you could have a stop $1 away and have 1000 shares also representing $1000 loss. Your max loss (in this example $1000) may have been achieved with both trades but which if either had the better stop loss chosen???
3) I don’t recommend being in the top and bottom picking business especially for a beginner but as to losses, know where you want to get out if the trade goes the other way before you enter. Hard stops or mental limits are personal choice but there needs to be a defined point where you cut bait.
Well whatever the method is , they say “every penny saved is a penny made”. Market always have opportunity to get in and out and make profit. What a trader (Poor Fellow ! ) can do is wait and make the same mistake repeatedly, Zillions of time till he learns to do the right thing. And there should be some money left to enter the market and make mummy proud !