Often I will overhear traders talking – or arguing – about the importance of cutting losses fast. It’s a trading law chiseled into the stone tablets brought down from Mount Buffett 2,000 years ago. Argue against this law and you will find yourself margin-called, penniless, friendless, and excommunicated from your local religious congregation (ok probably not that).
But I know many traders – two of which I will tell you about right now – neither of which closes their losing trades immediately. And both are doing ok. What gives?
Meet Nimer And Chris
The first trader is Nimer. In April, he made $21,500 trading a counter trend system (his list of trading-law violations includes counter-trend trading), and he didn’t close his losing trades right away. At one point he had an open loss of more than thirty six thousand dollars. It all came back.
The second trader is Chris. In that same month he made $8,000. He also failed to close all of his losing trades immediately.
Are they idiots? Are they mad? Will they one day lose everything and make fools of themselves?
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The Answer Is No. Here’s Why:
1) They keep their trade size small. I believe that if you do this, no other money management rules matter at all. If you trade for no more than approximately one mini lot for every $10,000 in your account, you can almost withstand any drawdown and trade your way out of almost any trouble.
2) They have rules in place for dealing with losses. One mistake many traders make is that they start adding to a losing position right away. Nimer states that he never adds to a losing position before it sets up the same trade all over again at a better price. That’s genius.
3) They talk to each other. Chris and Nimer are friends. They talk openly about their mistakes, and their current trades. They don’t hide anything from each other. They live thousands of miles apart but they stay in touch and keep each other in check. I’m telling you, if you don’t already have a trading partner like this, who trades the same system you do and keeps you honest – drop everything and get yourself a trading partner right now.
So what happens when you don’t cut your losses quickly? How should you manage a losing position when it goes against you? I’ll be be back later, and we can talk more about that.
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