It’s been a rough time for me in the market recently. With the SPY and QQQ roaring, there has been a relative weakness in the small-cap RUSSELL 2000 ETF (IWM). While large caps have been charging ahead, many of the stocks I was in which set up great haven’t followed. I made a plan, and now I have to trade the plan by cutting many of these stocks.
Traders will go through challenging periods of underperformance. It happens and is a part of the game. How we react to these situations separates the best traders from people who are forced out of the game. Today we will discuss why it’s crucial to cut trades that are not working.
Hope Is Not A Trading Strategy
There are numerous reasons why trades that are not working need to be cut. First of all, hope is not a trading strategy. Legendary trader Paul Tudor Jones once said you never want to wish or hope. You always want to be trading, in control. Cutting trades is all about opportunity costs.
Stocks need to be cut when they aren’t working to protect Intellectual Capital. You need to maintain flexibility of thought when trading. There are many trading opportunities that set up throughout the days. You don’t want to be caught up thinking about trades that aren’t working and lose focus on other opportunities that may be setting up across the market.
Getting out of trades frees up your mind to pursue new trading setups.
Trading is a performance sport. In order to be able to execute well, you need to be in the best possible frame of mind. Holding on to trades that aren’t working can bring up a host of other issues with your trading. Some of those include revenge trading, fear of missing out (FOMO), incorrect sizing.
If you don’t cut your losses you might see these issues creep into your trading decisions subconsciously not even being aware of them at the time.
Cutting trades gives you energy to pursue new trading setups. In my experience holding onto bad trades saps your energy. You begin to worry about the trade, sometimes to the point of being sick to your stomach.
Legendary trader Jesse Livermore once said “A loss never bothers me after I take it. I forget it overnight. But being wrong- not taking the loss- that is what does damage to the pocketbook and to the soul.”
Trades need to be cut to protect your emotional capital. Moving on to the next trade as quickly as possible helps maintain your emotional well-being. A vital part of not only trading but your life.
Trades that aren’t working need to be cut as per your plan. Respecting stops is what separates great traders from gamblers. In trading, you always want to be in control, seeking the following great trading setup. Trades need to be cut to protect your psychological, emotional, and intellectual capital, so you are always ready to use your trading skills to the best of your ability.