Stop Losses Are Part of Your Edge

Cutting Your Losses and Walking Away

Hey Traders,

This week I tweeted

Every aspiring trader spends their time figuring out how to get into the markets.

That’s important, don’t get me wrong..

But it’s equally as important to know to take your foot off the gas.

Let’s dive into why so many traders struggle to cut their losses and walk away..

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Psychology

We’ve all heard in theory that traders should cut their losses but why do so many of us struggle to do so when the time comes?

There are a couple of psychological reasons behind this..

The first one is loss aversion - most humans tend to hate losing more than they love winning.

The idea of accepting a loss from the get-go is something our mind does not want to accept so it finds ways of making it as attractive as possible to not have to accept one.

Secondly, it can also be rooted in a sense of overconfidence.

Especially if you’re in a position where you’re coming off the back of a winner or a string of winning trades, it can make it feel like losses can’t and won’t happen to you.

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Impact

Uncontrolled Losses

A stop loss is designed for a purpose - to help you to lose the battle, not the war.

One of the hardest things I had to accept was no matter how good our analysis and discipline are, periods of underperformance are normal.

If you never learn to cut your losing ideas, you will severely impact your overall chances of profitability.

Emotional Stress

I would argue this is just as important a point as the first.

Not cutting yourself off when you’re feeling mentally on tilt is a big reason why we end up ignoring our risk management from the get-go.

Your ability to make logical decisions relies on the clarity of your mind - if you’re not doing things to help regulate what you’re feeling, you’re always putting yourself in a position where your emotions will take the driving seat and that’s always a recipe for disaster.

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Action

Mindfulness

The most important skill you can refine in learning how to stop yourself from getting back into the market (financially and/or mentally) is actually being aware of what you’re experiencing.

My best advice on cultivating a sense of mindfulness comes through a regular practice of meditation and journaling.

Both of these combined will help you to cut yourself off when it’s needed to preserve your capital for the next battle.

Accept Uncertainty

This is arguably the thing that took me the longest to do in the markets but will have the biggest impact on your trading.

How do you best accept this?

I would say you need to witness it.

Give your mind exposure to what is likely to play out over a large sample size of trades - this is best done through ample backtesting and data collection.

Ultimately, you can’t be what you can’t see.

If you never give your mind the right exposure, you’ll never know what to expect and therefore always be surprised by things not panning out the way you expect.

Breathwork

Maybe some unconventional advice for some to hear but I’m a big fan of getting my clients to practice intentional breathwork.

Your breath is linked to every state you experience - think about how your breathing changes when you are angry, sad, happy and stressed for example.

When you practice intentional breathwork techniques like box breathing or the Wim Hof method, it rebalances the body and the mind and makes it far easier to regulate what you’re feeling.

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So remember, be mindful of both your financial and mental state - they both have a huge impact on your overall performance.

"Risk management is the foundation of your success as a trader.

It's not about avoiding risk but managing it effectively."

— Paul Tudor Jones

Over and Out!