Emotions are a big problem.
For me, for you, for everyone.
90%+ of people buy and sell stocks based on how they are feeling – not based on any set strategy.
If they “feel” a stock is good (based on a random neurological chemical reaction in their brain) – they’ll buy.
If they “feel” a stock is bad, they’ll sell.
These feelings are at worst completely random or at best just an emotional reflection of what they’ve been consuming…
Maybe it’s people on Twitter/X talking about a stock.
Maybe it’s someone on YouTube talking about a stock.
Maybe it’s their friend/neighbor/uber driver talking about a stock.
Maybe it’s the fact that the stock keeps going higher and higher.
A million different things can cause them to feel and then act in a way that is against their best interest.
But let’s face the facts –
There are few (if any) areas of your life where you make the right decisions when relying solely on emotions.
The Hard Truth: If you are making your trading decisions based on emotions – you are letting emotions rule your trading.
Needless to say – this is a losing strategy.
But Charlie, I find this idea of having to control my emotions offensive!
Whether or not you are offended by this – a fact is a fact. Relying on emotions is LETHAL to your account.
So how do I stop doing this Charlie?
Well – by having a plan.
That means a plan to enter & a plan to exit.
This means your buy & sells are going to be based on your pre-determined plan instead of your emotions.
Today I want to talk about one specific type of plan that few people know how to do… A plan for cutting losses.
One of the most important parts of trading within the stock market is cutting losses quickly. I know – it’s considered taboo to admit that you will have losses in the stock market.
I know – people on social media will make fun of you for cutting your losses because you aren’t “hodling” to the moon with them (as they lose 99% of their account).
Again – there are emotions and then there is logic.
No one that is logical believes that buying a stock and riding it down say 96% is necessary or makes any sense at all.
Sure… it could rebound some day – but is that a good use of your capital and time?
Yet – on social media people everyday encourage you to do that! Remember BBBY?
Since day one we’ve gotten a lot of pushback for our “trading” focus – traders focus on finding and playing moves instead of aimlessly holding and hoping.
Sure – there are a few plays out there that we’ve covered that certainly deserve long term conviction. But those are few and far in between..
The best way to play the market is to play the moves without falling for them. And an important part of that is being able to cut losses quickly!
So here are three steps to follow to effectively cut losses.
A.) Ask yourself – has your thesis changed? If you bought a stock because of X catalyst or because of Y reason and things have changed, it may be time to cut losses. If the thesis that led you into a position changes, your position much change as well.
B.) Sunk Cost Fallacy – are you in the position only because you’ve already lost money with it and want to earn it back? If so, this is a BIG mistake. This fallacy destroys families and collapses civilizations. If you wouldn’t buy the stock at the current price & setup now – don’t continue holding it.
C.) Stop Loss – before you enter a position, you should always have either an actual stop loss or a mental stop loss. A good rule of thumb is 10-15% down – but it may make sense to go more or less conservative depending on the type of position. If you can’t decide, I’d stick with 10%. If you want to use a Moving Average break, you can do that as well.
If you follow these three steps – you should never have a problem cutting losses.
Why are cutting losses so hard? Because cutting losses means admitting that you are wrong. That is very difficult to do emotionally. Your ego tries to step in and say “NO! I’M NOT WRONG!”
However – you can manage those emotions and that out-of-control ego if you follow the aforementioned steps.
Until Next Time,