Can anyone cut loss easily?
No, it is very hard due to emotion of Hope and Ignorance.
What are the factors that caused investor not willing to cut loss?
- not willing to accept the fact of their losing
- losing their hard-earned money
- overconfidence
- paper loss is okay for them as long as the losses yet realized
- 5 days of contra period yet fully utilized
To overcome the emotional of Hope and Ignorance as per below:
- having the correct mindset/ideology
- trade according trading rules
Mindset/Ideology
Mindset 1: Cut loss is a must.
Mindset 2: Cut loss at higher price so we can buy back more quantity with lower price with the residual capital.
Mindset 3: Cut loss is a capital protection.
Example:
You bought ABC shares at point A RM0.50 10,000units, total RM5,000.00 (excluded charges). At the same time, you don't have extra cash to average down.
Scenario 1: Never cut loss.
When share price dropped 5% to the red line RM0.475, you continued hold without a cut loss strategy. (Paper loss RM250.00)
However, the share price yet rebound and dropped 20% from RM0.50 to point B RM0.40, your paper loss getting more and more. (Paper loss RM1000.00)
During RM0.40, do you have extra cash to buy in when you saw a rebound started at point B?
No, you don't have as you didn't cut loss earlier.
At the end, you sold at point C RM0.450. (Loss RM500.00)
Overall: -RM500 (NET LOSS)
Scenario 2: With cut loss strategy.
When share price dropped 5% to the red line RM0.475, you cut loss and get back RM4,750.00. (Loss RM250)
As the share price continued dropped to RM0.400, it doesn't matter as you had CUT LOSS and done your CAPITAL PROTECTION.
During RM0.400, you reenter with all RM4,750.00 and able to buy 11,800units.
When the share price reached RM0.450 and you sold it. (Profit RM590)
Overall: RM590 - RM250 = RM340 (NET PROFIT)
Summary
From above example, can you see how cut loss can save you from huge losses at the same time it provides the opportunity to cover back the losses incurred with profit.
Trading Rules
What are trading rules?
Trading rules are a guideline for you to buy and sell (take profit or cut loss).
Trading rules can be mixture of fundamental analysis (financial ratio, performance etc..), technical analysis (technical indicator signal, price movement etc...) and money management.
Every investor has different trading rules.
Example for money management trading rules:
Take profit if price up 30% from entry point.
Cut loss if price drop 10% from entry point.
Summary
In short, once you set your own trading rules then follow it and never goes against it.
Conclusion
When you having the right mindset with trading rules then emotional getting far from you and to achieve "WIN BIG, LOSS SMALL" is no longer a dream.
Thanks for your reading.
Hope above information is useful for you.
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