One of my top picks is “Cut your losses short and let your profits run”. When you are on the losing end of a trade, get out of it. When you are correct in the direction, let it run to rack up the profits.
I hope this post will give you a some ideas on how you can handle these two very important components of success.
CUT YOUR LOSSES
Simply enough is to say get out of the trade when your initial reason for entering the trade is no longer valid or what you are expecting to happen, does not.
Looking at below chart of Arvind, we can see a level has been resistance a three times and now we decide to take a short at the next test of resistance where it make a failed breakout as seen in 3 arrow mark.
REASON FOR ENTRY: Test of Resistance, Triple top
TRADE INVALID: Break of Resistance Zone
As seen in above chart, Arvind did not even gave time for Traders to exit who are lethargic and again thought its failed breakout, Price rallies almost 10% in single session. So this is what we mean by Cut Losses with Min Loss and do not get emotional towards your trade. Many of readers would be able to recollect how they held on to the trade with hope of coming back and have to take bigger loss.
REC has been in a strong uptrend and you are waiting for pullback to happen to reenter the trade.Stock made a small Double bottom as seen with yellow arrow you went long keeping low as SL waiting for Stock to break the recent swing high. You do get some play in your trade. You want a long move so you need a higher low but you don’t get it. Price makes a lower bottom as seen with red line, Warning sign that the up move is in trouble.Price than comes to support and closes below it, Most of trades do not exit thinking it will bounce back. But than capitulation happen and prices crash waiting for trades to cover.
REASON FOR EXIT: Expectations of up move are diminishing.
Cutting your losses is much easier if you can understand price action. There are many clues on the first chart telling you that your long position may not be working. Is there a need to cut your loss at a further level when price has told you a story? No.
For me, trading is all about risk. The faster I can get out of a trade that is not working, the better. Be cautious of your stop placement but above all, listen to what the price action is saying. It will allow you to follow the quote of cut your losses short objectively and perhaps save your account from ruin.