Top Reasons to Cut Your Losses Short in the Stock Market

Finance Articles | March 27, 2009

The biggest mistake I have seen people making in the stock market is not getting out when they are wrong. Instead they allow a trade they are in to pull back 50% or more if things turn against them.

The biggest mistake I have seen people making in the stock market is not getting out when they are wrong. Instead they allow a trade they are in to pull back 50% or more if things turn against them.

The larger you let your losses get the shorter you will be trading the market. Here are the top 3 reasons to cut your losses short.

1. Trading is a Business.

Trading in the stock market is a business; your capital is the lifeblood of your business. If you let the loss on 1 trade get too big you will not have any capital left and therefore you will not be able to make any money.

So protect what you do have, that has to be your main focus.

2. Emotions run wild

Everyone gets into the market trying to make some good money. I have not seen anyone who has gone into the market trying to lose everything. So when you do first experience your first big loss it can be hard to handle.

It is very upsetting to see your account actually shrink especially when where planning on it growing into millions. It is hard to handle losses so keep them small. The smaller you keep your losses the less it will affect you.

3. The Less you lose the less you have to be right

If you lose 50% of your account you have to get into some pretty big winners just to break even again. And if you get into another losing trade after that, well your account is going to be negative for a long time.

If you only lost 2% of your account on 1 trade that is easy to make up. 1 big winner can easily pay for several small losses and then some. Obviously you still want to be profitable as often as possible, but if you only need to be right 40% of the time to be profitable it is much easier to get that then if you have to be right 90% of the time.

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ABOUT THE AUTHOR

When I was young I wanted to learn how to trade the stock market. So I traveled around the country listening to professional traders talk about how they are making money in the market. Now I understand how easy it is to make money in the stock market and started a site http://www.stocks-simplified.com to help others learn.