Thoughts on Investing

Thoughts on Investing from Kid Dynamite

Trading Rule #4 – Learn To Take Losses

Just because a position has moved against you doesn’t mean you can’t sell it.  Learn to take losses.

This rule sounds simple, but is one of the most difficult psychological concepts for human beings – it’s one of the main reasons trading is so hard in my opinion.   I’ve traded for about 15 years, and I’m STILL trying to get better at this concept.   The best traders have absolutely no problem at all “locking in a loss.”

The better you are at selling a stock whose thesis has failed (see Rule #2), the more money you will make.  The greatest mistake that rookie traders (and veteran traders!) make is being unwilling to take losses.  We rationalize in a number of different ways: “oh, it will come back my way,”  or “I was wrong on the timing – I’ll give it a few more days,”  or “oh, now it’s a value play – even though I bought it specifically for an earnings trade, it’s now so cheap that I have to hold it.”

This gets back to Rule #2 – when you know why you’re in a trade, you will know when to exit it – but Rule #4 is the implementation of that.  You have to be intellectually honest with yourself, and not turn losing positions into bigger losses.