What cut losses short, let profits run means? Success is not the evidence of wisdom – just like the defeat is not a proof of stupidity. Many novices traders draw up a list of rules of trading, which would help them maintain proper discipline and ensure success in the stock market. They make up such list for months. Whenever trading ends with a loss, they are puzzled, think, roll over in bed, asking what they should do next time not to repeat the last error. As a result of this struggle with the world of speculation a list of rules, statements, axioms is created that say what you can and can’t do in order to be successful in trading. After some time, frustrated, they throw it in a bin. It does not contain errors. The basic mistake was to create a list based on the experience of the last failed transaction, as if the next transaction would be similar to the last. Life is more difficult to predict future market. The next trade rarely resembles the previous, resulting the trader, with all his wisdom, is still in the starting point.
First – let your profits run. I’ll give you an example of paradox, which is typical in the preparation of such a list. According to one of the common rules on Wall Street: “You can’t go bankrupt accepting earnings” or “You can’t go broke taking a profit.” If you bought the shares at a good price, and after a few days you have earnings, and after the next few days you lose, you’d agree with this rule. This rule says – sell with small earnings, and it makes sense, but only in the context of the last transaction with a specific result. But let’s take look at the next transaction. You buy at a great price, and after several days you sell it with a small profit. Much to your astonishment the prices continue strongly going up by several hundred percent. You’re annoyed. So you ask the advice of an experienced stock trader, because you want to know where lays your fault? Experienced trader takes off his glasses, and looking at you with pity he says: “Never forget the following rule. Accept small losses quickly and let for the accumulation of your earnings”. In other words: “Cut losses short, let profits run”. So you type this rule to the list. This rule says – do not sell with a low profit.
So the first rule is in conflict with another rule. This is not an isolated case. For example, the third rule is: “Stay cool; never let emotions rule your trading, “a rule four is: “If a trade is obviously going against you, get out of the way before it turns in to a disaster”. in other words, the third rule warns – do not panic, and the fourth – do panic. In the final analysis, these rules are useless. I realized that I had to describe the forest, not the individual trees. After several years of trading on the stock market I started creating another list. This is a list of requirements which allow traders to gamble successfully. Most truths are characterized by simplicity and this list contains only five rules. In addition, the last two are derived from the first two. Earnings in the stock market, as most of the prizes offered in life, are not so easy to achieve. If you have time, motivation, relevant knowledge, adequate mental preparation, you can join the ranks of successful traders. To achieve this, you’ll need: method, discipline, experience and accepting the small losses and big earnings.
Blind and reckless is the one who relies to be at the mercy of the fortuity. – Seneca
Cut Losses Short Let Profits Run. The method should be objectively defined and thought out to the extent that if anyone asks you how you decide, you can explain it to him, and when he asks you six months later he will hear the same answer. This does not mean that the method can’t be improved; however, it must be developed in full before putting it into effect. One of the requirements relating to the method is the assumption that there is no perfect method. God is perfect, the method doesn’t. Stock traders, who by nature have to be perfectionists and rigidly apply the adopted method, just lose the time. If they act like this, they’ll never develop their own method. In the last 100 years hundreds of methods were created that contribute to the success in the world of trading. Getting to know them takes time, but this is the simplest way, to meet one of the five requirements for success. I think that the stock trader must spend a minimum of three to five years, until he’ll will begin to be successful in trading. I also think that each trader being successful in the stock market has its own unique and favorite method that fits his personality. I never met two traders working the same way. Premature depletion of funds or emotional breakdown is the biggest obstacle in achieving success in the stock market. So let your profits run!