In this article, I will discuss the essential principle of cutting losses in stock trading and how it can significantly impact a trader’s success. Through my years of experience in the industry, I have witnessed numerous traders, including Boy Genius, who fail to recognize the importance of this fundamental concept, resulting in detrimental consequences for their trading performance.
I am Sharing a Case Study on One of My Student during our 1×1 Coaching How we undestood his problem and Helped him to Improve his Trading. I decided to highlight these specifically, as I’ve found there are a number of common themes amongst struggling traders who I’ve worked with. Hopefully, by detailing their challenges and offering some action points, you too can take something away from this article to help to improve your Own trading.
Despite his impressive intellect and potential, Raj was struggling with a fundamental concept that is crucial for success in trading – cutting losses. In this article, I’ll share my experiences and insights on why cutting losses is essential and why Raj’s refusal to do so was hindering his progress.
The Importance of Cutting Losses
We had repeatedly instructed Raj to stop letting his losses run past 20000 per trade which is 1% of his trading capital. However, despite the guidance, Rajs’s trading book was filled with losses that went beyond this limit of 20 K . When the problem persisted, I called for a 1×1 Coaching with him to address the issue. During our conversation, Raj expressed his doubts about the effectiveness of cutting losses, claiming that it might not be the most efficient way to trade.
After our talk, Raj still was not convinced. I asked him, “Do you understand why this is important?”
Raj replied, “I am not sure that that is the most efficient way to trade.”
Did I just hear that?
This genius has been trading for a few days and all of a sudden he is an expert on trading efficiency? We patiently discussed the following trade.
Raj had bought a stock in front of a Gann level. This was excellent! Just as we teach it in our training program!
However, the Gann level broke and the stock traded lower. I re-taught that when the Gann level broke that he must sell. And he said,
“But how do you know that the stock is really going to go down?”
Right then, I knew we had a problem.
He had not been listening. We had covered this probably 50 times already. I patiently explained again, “You bought the stock because it was holding a Gann level. This is the reason why you entered the trade. When the Gann level drops, your reason for being in the trade no longer exists and you must exit. You cannot be sure that the stock will go down, but that is irrelevant.
We play the Probablity . We make trades where our win rate is 60–70 percent with a downside of one and an upside of five. When the stock does not act like we expect, then we exit and start over.
Raj’s skepticism about cutting losses surprised me. After all, he was a relatively new trader who had only been in the market for a few days. Yet, he seemed to think that he knew better than his mentor and other experienced traders. I patiently explained to him
“We are not in the business of losing money to prove that we were right. So when the stock drops below the Gann level, you have no other choice but to hit out of the stock. Holding a stock below support is now gambling. And that is not what we do here.”
The Need to Respect the Market
Another issue that I noticed with Raj was his disrespectful attitude towards his mentor and other experienced traders. He would cut off his mentor and me during discussions, showing a lack of respect for our insights and experiences. I explained to him that disrespect towards partners and financial backers could translate into disrespect towards the market. Trading requires discipline, humility, and a willingness to learn from others, and disrespecting the market would only result in the market not respecting him back.
He agreed and commented that he would get better. As a mentor and an experienced trader, I’ve seen firsthand the importance of cutting losses in trading. Boy Genius’s refusal to follow this fundamental concept was hindering his progress and jeopardizing his potential for success in the market. It’s crucial for traders, especially beginners, to understand that trading.
As a mentor and an experienced trader, I’ve seen firsthand the importance of cutting losses in trading. Raj’s refusal to follow this fundamental concept was hindering his progress and jeopardizing his potential for success in the market. It’s crucial for traders, especially beginners, to understand that trading
The decision to cut losses is not always easy for traders, as it involves confronting the psychological challenges of trading. It requires admitting that a trade has not gone as expected and accepting a loss. Many traders struggle with the fear of being wrong or admitting defeat, which can lead to holding onto losing trades longer than necessary. However, it is important to remember that losses are a part of trading, and every trader experiences them at some point. What separates successful traders from unsuccessful ones is their ability to manage losses and move on to the next trade with a clear mind.
So By Analyzing the past we were able to Undestand Rahul’s problem and able to guide him to come out of that unconscious reaction pattern and helped him in improving his trading.