Cut Your Losses

"If a trade is going against you,
give it a bit more time to turn round."

This piece of bad advice explains the reason why the systems traders take all the profits from the commodity markets.

We human beings are not good at preventing our emotions from interfering with our trading.

This shows itself in many ways - for example:

We don't like losing. And we hate it when we make a decision and then see immediately afterwards it was wrong.

We love winning but when we are winning we start to worry about losing what we've won. Why don't we just cash in now?

We see every trade as an individual battle to be won. Our pride and trading reputation is at stake every time we make a trade.

So, if this trade is going against us, just give it a bit more time to see if it will turn round. We would hate to close the trade now and find that afterwards it turns into a winner.

All of these difficulties arise because traders get their emotions caught up with their trading.

Systems traders worked this one out a long time ago. They realized that human beings had strengths too - like their ability to invent good strategies and build them into successful trading methods.

That is why they delegate their day-to-day live trading to their computers and concentrate their own efforts on what they are good at.

They know that some of the trades they cut will eventually turn out to be winners and they realize that this is the price they must pay to keep their losers small.

They don't care about individual trades. They care about their overall results.

So if a trade is going against you, cut it where your system says it should be cut and don't give it any more time.

 

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Copyright David Bromley 2006
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