It bewilders me to see traders not cutting losses when they know they should. I am not trying to trivialize the emotions that come with purchasing a stock that you have high hopes for, only to watch it turn into a big, fat loser. At first, you are down a quick 5%, then it becomes 12%, then 18%, then 20%…No, I can genuinely appreciate that situation. However, after a certain point, there has to be an element of professionalism that kicks in. After all, we are making a serious effort to make money in the most competitive enterprise that the world has ever seen, filled with competitors sporting breathtaking combinations of wealth and intelligence.
Beyond that, there is NO EXCUSE in this day and age for not cutting a loser. Logistically, all you have to do is click the “Sell All Shares” button and confirm your order. That is it. You can do that in the privacy of your own home, or you can do it in a coffee shop. And guess what? No one has to know. Now, let’s suppose that you tweeted out your entry to said losing trade on Stocktwits, and you are now too embarrassed to tweet that you sold for a loss. Guess what? You have it back asswards, to quote Charlie Munger. If anything, when you tweet an entry and exit for a losing trade, you will be applauded for your transparency and gain a tremendous amount of respect on the stream. If anyone acts like a jerk and tries to talk trash because you lost money, just block them and move on. For every one idiot on the stream, there are tens of decent people who are genuinely interested in reaping the benefits of social leverage in trading.
Perhaps it my background, as the ease with which traders can cut losses nowadays is laughable. Trying to cut losses in the poker world seems like a much bigger deal, especially if you are not playing online. If you are a local, you have to drive to the brick and mortar casino, wait for a seat to open up at the poker table, get your chips, sit down, enter the game, and wait to be dealt reasonably good cards to play. Some days, despite (or perhaps because of) how well you play and how poorly others do, you will be destined to lose money. When that happens, many poker players find it extremely difficult to physically stand up, walk to get a chip rack, rack up their chips in front of the whole table–who knows you are losing money–tell the dealer you are leaving the game, walk over to the cashier to cash out their remaining chips, walk out of the poker room, and drive away from the casino. Indeed, logistics and pride are sometimes interesting bedfellows.
As a trader living in this day and age, it is a significant and costly mistake to not take full advantage of the ease with which technology allows us to quickly cut our losses and move on. Excuses like, “I know the right thing to do is sell here and move on, but I don’t want to give up,” are less and less valid when you have the technology right at your fingertips to actually do the right thing.
In addition to that, who really cares that you lost money on a trade and realized it, literally and figuratively?
Its easy to say cut losses but lets look at the facts
many people who “cut losses” in the past 2 years could of held on and eventually sold for a profit in the GREAT BULL RUN OF 09-10
a simple screen of year to date gains of stocks over 5$ and avg 500k volume:
around 1300 out of 1600 stocks are POSITIVE for the year
that’s over 80%
So in fact cutting losses would of just traded your way into hole via losses and commissions
there is a time and place for everything. Obviously if you are a degenerate 52 wk high breakout buyer cutting losses is more important if it turns into a top
Sounds like someone sold all of his equity positions on March 9, 2009…
Naw I think he went short March 9, 2009. LOL!!
“Holding on” through the great bear market of 2007-2008, in order to eek out a small gain during the great bull run of 2009-2010 totally proves chessNwine’s point. Cutting losses does not mean selling at the 2009 lows, in fact cutting losses means never being in a position to HAVE to sell at major lows. Sure, you can sell for a small loss and watch things bounce back, but you’ll never have 100% of your equity locked in for 3-4 years waitng to break even. In fact, if you cut your losses on most of your holdings when the market turned in late 2007 you would have had the cash to buy once the market bottomed.
I’m not saying its easy to sell the highs and buy the lows. Just saying that if you had rules to cut your losses you’d never be in a position where you have to make the choice of cutting for 50% losses or holding on hoping things recover in 3 years.
its even tougher,when as a retail investor in a 401k, who “must” wait till the transaction is settled. like i did this week with non other than that yoku POS,that it tanks like a ballon shot out of the sky by a cannon before its too late………..but i digress,as soon as this ticker appeared on tuesday,out of nowhere,and did the full circus act ,what were people to think. now i wont sit here and rant and rave that it was all “the goldman sachs” fault, but think about it, who, underwrites a company, knowing full well that the company is pretty much bankrupt,and then go on to ipo the company without any remorse to the public in which it should have a fudiciary responsibilty to. cause when some of us dummies’,punched up the ticker,guess what,there was no available information on the company at all…….so then,after erb,the herb greenberg came out with his two cents yesterday on this yoku and its pitfalls,how come what he knew,wasnt posted on the company when you looked up the symbol,as is all info when you punch up a ticker.also,i find it more suspicious that the underwriters,gs, p.jaffery,pacific crest,and the other all exercised the over allotment drove it up to 50,and then lent out shares to only each other to short the hell out of it. cause you couldnt find one share to short from anywhere, according to all the chatter on twits.as it sits now,i havent lost anything.just gave back its 2 days of gain, but come monday morning,after its too late,and that thing gaps down to its opening price,and i cant still unload cause it hasnt settled yet from buying it, i guess will leave me a bit unsettled…with a loss,yet to be determined. …………..i guess now i understand why people want nothing to do with investing anymore,and “sideline” money wont come back in. the underwriters pulled a gypsy scam of pick pocket as do those types during holiday times. but you wont see anyone trying to take them to court.
Trading an IPO (Chinese no less) in an account that you KNEW would take 3 days to settle before you could sell does not sound like good risk management. You had to know the volatility was going to be extreme in this thing. It’s not like you were buying JNJ.
Great post Chess.
Regarding the cash account 3 day settle or get stuck with the free ride excuse – I’ll grant I’ve been stuck in this situation since I trade a number of cash accounts, BUT THERE IS NO EXCUSE! You can’t blame the account, it’s greed plain and simple.
If you are in this situation:
1. You are gambling that the position will last 3 days;
2. You are trading 1 or 2 too many positions for the account size. (You may be following all other risk parameters);
3. The situation is easily remedied by keeping 1 position size of cash on hand in the account.
Chess, we all know the reasons for not taking losses are psychological, and nothing more. We don’t want to be wrong, or we want something other than making money out of the market.
I firmly believe (as was stated in the Market Wizard Series) that we all get exactly what we want out of the markets. If we want to be winners (i.e. make money), we need to do the work and have the commitment. If we want excitement, we can have that. If we want to be losers, and complain, we get that.
Once again, great post. See you in the stadium.
For the most part I agree Chess. Some of us do a combination of very short term day trading, swing trading and long term trading. I agree to cut losses on day trading and swing trading. On my long term trading I am willing to take a hit if I believe in the long term prospects of a company or sector. Position size in spec plays is the key. For example I own 2 China Lotto stocks that have done poorly but I will own them until profitable. I bought MY at 11.3 and CBAK at 2.09. The combined total of both shares is only 1% of my portfolio. I have the patience to wait even 1-2 years and beyond. (FLY with FTK).
I follow you on 12361, which is amazing and so helpful. I follow your lead on most of your trades because as a trader you are smarter and more experienced than me. Your analysis is the best I have seen and you have made me a ton of money. The energy and level of experience on 12361 is amazing.
Easy to cover the cost of PPT and 12361 in one good trade. Because I have been so successful following your swing trades I plan on putting more of my funds in swing trading over the next few months. Thank you, and thanks to RC too.
yogi,and wife,great valid points,but there is a plethora of folks out there that dont have the luxury to,( and here’s the key word),”trade”,in and out of the same stock,an hour after we bot it. in your world,if the move was bad,you back right out. in the settlement trade, when you need to get out of dodge,you cant,so your screwed. so even though i may posses the same knowledge in chart reading and other skills that are necessary in understanding the craft in order to be a success,some of us,such as my self are still at an unfair advantage to someone that can make the same 3 trade on one issue during the session per day. thus having more control over loss.
drummer,
I don’t want to sound like a dick, but your statements are so full of fail they need to be pointed out as such.
in the settlement trade, when you need to get out of dodge,you cant,so your screwed.
If you are not taking this into account prior to entering a trade you have not thought things through. I am no expert and never professed to be one, but I am always aware of what can do significant damage to my account. If I’m trading in my cash account and have unsettled funds available I sure as hell am not going to enter a position in a very volatile stock that could get hammered in a matter of minutes.
On the other hand, if I am looking for an opportunity to enter a long-term trade (think weeks or even months) then I have no problem using unsettled funds. Done it many times and will continue to do so.
even though i may posses the same knowledge in chart reading and other skills that are necessary in understanding the craft in order to be a success
I am not going to question your chart reading abilities. Most likely you are better at it than me. But let’s go back to the Yoku / cash settlement issue. You can be the greatest chart reader ever but in this situation it will do you no good. Why? Because you are forced to hold for three days as you mentioned before.
Since your time frame is forced to be days you should be looking at a daily chart, no? The damn stock only traded for 2 days before Friday. What in the hell are you going to get out of chart reading in that case?
From your first post:
when some of us dummies’,punched up the ticker,guess what,there was no available information on the company at all
Here is the crux of your dilema. You had some choices to make before doing anything:
1) Am I looking at this as just a quick in and out trade hopefully scoring a couple of points?
If yes, then you must have known that the cash settlement problem should rule this out.
2) Am I looking at this as a long-term holding?
If yes, then the “no information available” problem should rule this out.
Based on your prior comments I cannot think of one legitimate reason you should have even thought about buying YOKU; much less actually entered a position. Even without the benefit of hindsight I bet you honestly know the best thing would have been to pass. Let things settle out and then evaluate whether it’s a good opportunity.
Again, sorry for being a dick but it sounds like someone needs a wake up call.
po,your absolutely right. all i wanted out of it was the short term play, 2 weeks tops, if that. most of the time i dont care about settlement issues because i’ll hold for any amount of time,usually long,i consider long,for me anyways.6 months to 4 yrs. yea, i know that i jumped into this thing blind, and it was/is the decison/gamble that i decided to take,which is all contrary to other peoples disciplines.its a small position and if i do lose any money,it wont be anything that will cause long term damage, besides,i dont go into this thinking that i’ll win all the time. and no,your not being a dick,but when you say.”i cannot think of one legit reason you should have even bought yoku”. then answer me this please, if you will.then what is the reason to enter the market in the first place if you can’t jump on an opportunity like that,isnt this what its supposed to be about, an opportunity. …………..its pretty funny though, that every poster/trader that made any comments over at twitts talked the most denile about the stock,when in fact,none of the people who trade daily on the same stock over and again ever twitted that they scalped the stock and made money. even the ones that dont hold overnight. some people buy insolvent bank shares,i got an insolvent chinese lottery ticket ticket.
what is the reason to enter the market in the first place if you can’t jump on an opportunity like that
You jump on an opportunity like that if you have settled funds available. There will be other opportunities so don’t worry about it too much.
If I recall correctly BIDU started off like gangbusters then lost about 60% of its value very quickly. It was about a year later before it got back to the IPO closing day high. But once it got there again it hasn’t looked back.
Glad it was a small YOKU position for you. Since you are willing to hold it a while you might wind up making money on it after all. If you are looking for info on the company you can get the Prospectus off the sec.gov website.
owned bidu for 4 yrs, and was happy with that,not that this will be the same,and i’m not expecting it to be. but as chess’s blog, in this thread,is saying,at least the way i interpit is,”you made a mistake,dont be afraid to admit it”………so i did. i even stated my buying it,in response to someone at flys blog on wed last. in this craft,when your on your own, you WILL make mistakes. and the better i have become, i have made less. but know this,it wont be the last.and anyone to think that if they are gonna do this for yrs to come,.. and i’m sure your smart enough to finish the rest of the thought.
I like the poker analogy. When you sell a loser, it’s like paying your ante and folding a losing hand. No shame.
I don’t buy and sell all of my positions either on a slide. I do due diligence (actual fundimental research, heaven forbid) and keep a foundation that I do not trade, yes it goes down and it goes up, I don’t worry about it. Year after year I receive my average10 – 12% gain. Even after 2000 and 2007 these stocks keep plodding along doing their thing and with a nice dividend…When I see a dip, such as May 2003 and even July 2010 I simply add to my position which sweetens the pot. More importantly, this keeps my taxes and comissions down. To each his own…
I understand how people who trade or invest long(er) term can get confused by what we are talking about. The principle is EXACTLY the same with short term, long term, technical, and fundamental trading. If you are taking a fundamental position in a company, you may want to scale into a position rather than buy all at once. You may want to buy in thirds from $20 – $15. Before hand, you have determined how much risk you are willing to take on this position.
The stop loss in this case needs to be executed when either the fundamental thesis for the trade is no longer valid or you have exceeded your predetermined amount of risk. You take the loss and move on. The stop may be 50% of your original position. It still shouldn’t exceed more than 0.5% – to 0.1% of your capital. You will have much smaller positions. Your risk will be managed and you will live to trade another day.
the range of answers pro and con for holding vs selling a losing position regard time. if you have time and are not interested in/concerned about turns, stick to your fundies and go with it. Nine times out of ten fundies will win over the long term. However, if you are amazed by the effect of increased turns or are trying to make a living by trading, you absolutely must be concerned about time.
chess’ point concerns time. the fundie point of view does not, assuming you really have a handle on fundies. think “walmart” vs “if you build it, he will come.” if there is one thing i have learned about trading/investing from the very smart folks on this site, the latter mentality does not grow as quickly.
if you insist on fundies, keep your day job.
Amazing post my friend, enough said.
Drummerboy I don’t know if trading in an IRA (as I do) and a 401K is the same. If it is you do not have to wait till settlement to sell. You do need enough cash in your account to cover the trade however. You can buy and sell in the same day (day trade or stop out ) 3 times in a five day period. I know this because a good friend whom I meant on stocktwits is a great trader but also has Roth accounts that they trade in. If your broker is like mine which is Fidelity they will be no help and give misinformation. I can tell you this I have had no SEC violations since following these rules.
Chess another great article, you are one of the best. Congrats to you and RC.
legalgambling, its a sep ira.
Drummerboy, I know trading in an IRA takes some getting used to. Take time to get to know the rules, you might be making it harder then it really is. There are drawbacks but there are benefits too. Tax time certainly is easier! For me the biggest plus has been I’ve become more disciplined which has produced profits. No IPO’s for me. 😉
You have to have a disciplined plan with good risk/reward. Risk management with Emotional and Capital preservation is The Key if you want to continue trading. I can telll you from painful rookie experience IMO you did a lot wrong mate. It had nothing to do with GS. There is a lot of crap stocks out there it is your job to only invest in stocks you KNOW well enough to buy. You take credit for your wins and you must take credit for your losses too. If you don’t you can’t learn from your mistakes. None of us are playing with Monopoly money so good luck. From the comments here there is a lot of help and caring here. If you listen you will be fine.
The problem is not about cutting losses or not. The problem is that clowns dont know how to size their positions.
Personally, I hate using stops. It is lame and worthless for me. Sometimes, I get rolled by 20-30% only to see it coming back alive. This is a very expensive and exhausting process.
The solution for me is that I keep my initial entry low, with 1-2% of my capital. Then, I give the stock time to see its behavior for 2-3 weeks. If I like its behavior throughout a general market weakness, I go on accumulation mode in preparation for a general market rally.
The Market does not look like a bitch, but the fact that it is a bitch… well, that makes it all the more unwise to try to fuck it like one.
(When you click the ‘sell’ button and sacrifice your pride in favor of preserving your capital), “…you may feel a slight sting. That’s pride fucking with you. Fuck pride. Pride only hurts, it never helps.”
However much we may have loathed him during the movie, on this, Marsellus Wallace was right.
There is no pride in making 5% on 9 winning trades in a row, only to lose 90% on the 10th. The only pride that counts is the pride in losing 1% on 9 losing trades in a row, only to make 50% on the 10th.
Good advice Chess especially for trading swings or daytrades, cut your losses and move on quick when the market proves you wrong . That’s doesn’t mean never trade that stock again , always can try again at a lower level or at a breakout . I ‘m sort of a occasional reader here , when I do check out the site as always on this blog their is some intelligent advice. For posting trades and losses .not so much as often now as I make a lot of intraday trades sometimes there over in a minute, but when I do post my trades real time or when I did post all of them on another site, I always post my losses when I take them and like to focus on them more often then wins in order to better my trading and help others learn from my mistake or point them out to me. With day trading I take one a day at least ,don’t like em of course but just go to the next trade. For Long term say 1-5 years investments it’s different personally I’ll scale in those and set my sell all bad timing price before I start the trade so I know when to quit and say bad timing to myself to move on. Short term stuff couldn’t agree more cut em quick and try again be with a different stock or the same one, just don’t revenge trade give yourself a strike limit for each ticker imho.
p.s.
looks like we followed that pattern till now we talked about a while back.
Keep up the good work !