Easy Way To Cut Losses

Discussion in 'Strategy Development' started by malcrob, Sep 19, 2002.

  1. malcrob


    I have successfully given up two unhelpful behaviors,
    one was smoking which I stopped 10 years ago; and the
    other was drinking alcohol, which I gave up last year.
    Most people these days agree that smoking is a bad
    habit, but equally most people still consider drinking
    to be perfectly healthy in moderation. I no longer have
    that opinion about alcohol, but I have no interest in
    attempting to change anyone's view about either
    drinking or smoking.

    I bring this subject up because I think there are
    parallels to trading. If we go back to basics we know
    that to be successful trading we need to cut our
    losses and let our profits run. I think everyone agrees
    on this, it is stated in virtually every trading book
    ever written. The fact of the matter is though, that
    we all seem to be hard wired to do exactly the opposite.

    If you look at your trading results over any period
    of loss, you will see that your losses come from trades
    that you did not cut. It is unlikely that your losses
    are attributable to a large number of small losses, far
    more likely that they came from a few large losing
    trades, i.e. trades that you did not cut. If this is
    the case for you, then success in trading will not
    depend on you finding the right trading system or idea,
    it will depend on your ability to learn to ruthlessly
    cut your losses. The question is why is it so difficult?

    I smoked from the age of about 12 until I was 25. During
    that time I made many attempts to quit, like most smokers,
    but it was far too difficult, so I never succeeded. That
    was until I read a book called "The Easy Way to Stop
    Smoking" by Allen Carr. Allen Carr's book got me to
    consider whether I actually enjoyed smoking and I
    discovered that I didn't at all. Once I made this
    discovery I stopped smoking, I stopped smoking and have
    never had the desire to smoke again. It really was easy.

    The reason that I had found it so hard to quit before
    was because I was under the illusion that I enjoyed
    smoking and that there were benefits to be had from
    smoking. So even though I was also aware of all the
    negatives of smoking I couldn't give up because I was
    giving up something that I loved doing (or so I thought).
    What has this got to do with trading?????

    Well what I have learnt from my experiences of giving up
    smoking and drinking is that I only do things that I am
    motivated to do, i.e. I only do something because I think
    there is a benefit to me in doing it. As soon as I realize
    that there is in fact no benefit whatsoever, I stop, without
    a single thought. I found this to be the case with both
    smoking and drinking, when I realized that the benefits I
    thought I was receiving were in fact illusory, I just stopped
    having any desire to drink or smoke.

    With trading I realize that when a trader finds that he
    repeatedly lets his losses run and cuts his profits short,
    it is because (perhaps on an unconscious level) he believes
    that it is beneficial for him to do so. Next week I will
    discuss what possible benefits a trader might believe he
    will receive by not cutting losses.

    Kind Regards
    Malcolm Robinson

    Learn How To Trade The Futures Markets
    The Online Course Is Now Available!
    BUY NOW at http://www.TheMasteryOfTrading.com
  2. Great post.

    I used to smoke about a pack a week until I realized that it was just really a bad habit. I was mainly a "social smoker" and lit up only at bars or when I was getting stressed at work.

    At the same time, I work out on a daily basis and run a lot, so I wasn't helping myself by smoking. So, eventually I just stopped smoking totally. I tried weeks ago to have one cigerette but the taste of it was awful. It is amazing that anyone could ever learn to tolerate sucking in that god-awful nerve poison nicotine.

    However, I can't say the same thing about drinking. I probably drink more than I should -- about 10 beers a week on average. Drinking, especially at my age (25) is downright impossible to give-up. The will-power needed for that just isn't found in my age-group.

    Besides, if you go out a lot and don't drink, you turn into a social ostrich. It is true -- some things we just do in life to fit in and I admit I do many of these things.

    Anyhow, turning it back over to trading. I think cutting losses is very important, but the "cut your losses and let your profits run" is a great thing to say but not so easy to implement. What if your trading system is a scalping system that depends on limiting profits to achieve a higher win ratio?

    There are many systems and many of the blanket statements that have turned into trading axioms just don't apply to all traders / situations / systems.

    When I traded ETF (QQQ), I sometimes averaged up, down -- I've done a lot of things you "aren't" supposed to do, but sometimes those things are done because there are situations when you can get away with it and some situations where you cannot.

    Then again, what do I know ... I drink too much!!
  3. malcrob



    I think the most important thing is cutting losses, I know when I shopuld get out of a trade and when I ignore that feeling, I am trading badly.

    For the most part running profits means, to me, having bigger average gains to losses. Though I appreciate your point that if you are scalping and have a high success ratio, your average profits don't have to be bigger than your average losses.
  4. malcrob


    Apologies, I mean aphie