Cut Loss Before It Is Too Late

Before I became a professional trader, I was a martial artist. In any kind of martial art, before you ever learn how to hit your opponent, you must learn how to prevent opponents' attacks from killing you. This is the same in the investment world. Before you learn how to win big in the market, you must learn how to cut loss. If you want to become a professional trader that is able to earn a steady passion income, you must stick to a investment plans and a reasonable cut off point.

If you own a garden you will know the truth of disciplined gardening. It is far easier to get rid of small weeds regularly before they have grown long strong roots. If you commit yourself to clean the garden every day or at least regularly, the garden will naturally reward you with beautifully flourishing flowers.

However, if you ignore these weed and let them grow, they will become more difficult to be removed. Then the time you spend on them makes you shift your focus from other fruitful plants to the weeds and hence further decreases the productivity of the time spend on getting rid of weeds. Even worse, the big weeds can destroy your garden.

Learn from this parable and clear all the small losses every day, when they are small. You do this by keeping the cut loss point. When the loss of a single transaction reaches a certain level, you give the money and leave to prevent any further losses. This significantly protects your overall profit.

We measure possible future profits of an investment event with the Expected Value because probability or risk is taken into account. There is always risk and risk means possibility of losing. Deal with them when they are vulnerable instead of waiting them to grow big and crush you.

Investors seldom tell you how they take out many small losses in their accounts. But many investors would tell you the story about one or two big losses that consumed all the money in their investment accounts.