90% of your losses come from less than 10% of the trades.

If you don’t believe me check your P&L report and You will see that you are at loss due to very few but big losses.

In this article, we will learn why you are not able to ride your winners and cut the losses.

And how you can do it by following a few simple principles.

Why Are You Not Able to Ride the Winners and Cut the Losses?

To understand this let’s first play a game

Choose either (A) OR (B) from both the cases

CASE A

A.) A sure loss of 10000 Rs

OR

B.) A 95 % chance of 12500 loss + 5 % chance of “No Loss at all”

CASE B

A.) A sure gain of 10000 Rs

OR

B.) A 95 % chance of 12500 RS gain + 5 % chance of No gain at all.

Let me guess, most of you will choose

Option “B” from case 1 and option “A” from case 2.

Why do most people choose option B from CASE 1?

The answer is “GAMBLING CHOICE”, They want to have a chance (5%) of making no loss at all.

Though 95 % chance is they would lose 12500 Rs, they still choose option B.

Option A is much wiser to choose than option B because in option 1 you will only lose 10000 Rs whereas in option B you have a High chance of losing 12500 Rs.

This is the opposite of “Cutting your losses short.”

Why do Most People Choose Options A From CASE 2?

They want to choose option A because they don’t want to lose the sure-shot money and don’t want to have a 5% chance of not gaining anything at all.

Even though Option B is a much wiser option as it has a 95% chance that they will make 12500 Rs.

But most people choose the sure-shot money, and that’s why they forget about the “RUN YOUR PROFITS RULE”.

These biases towards choosing small profits and big losses are the reason 95% of traders lose money.

So, How can you ride the winners and cut the losses?

1. Place the SL in the System

Yes, you heard it right, Place the SL in your system.

Most of the traders don’t place SL orders in the system.

Few think that they are being watched by the operators and their SL could be hunted.

Few just don’t even know what their stop is, so they never put the SL.

And the last category is who says they have Soft SL, which means their SL is in their mind.

Now you would say, How does placing the SL in the system help you lower your losses ?”

Let me give you an example

A guy named Raman has 1 year of market experience and has found his trading style, but he is not profitable yet.

He gets a buy signal in Reliance at 2000, his SL according to his analysis is 1950.

He doesn’t place SL in the system because he believes in SL hunting.

Reliance Initially moves in his favor but then starts to decline and reach towards his SL.

He is worried, as he doesn’t want to lose on this trade.

He turns on the Tv and watches a financial news channel, and he sees that everyone is Talking about Reliance because of some positive news.

One of the panelists even said that Reliance is about to go to the moon.

Raman is overjoyed after hearing this news, he calculates how much money he will make if Reliance makes a big move.

But reliance is still going down and about to reach his SL.

He thought that what if his SL level is wrong, and maybe he will get a good profit, so he held the trade without any SL.

The next Morning Reliance share falls 5%.

Raman is in shock, that how come reliance fell this much.

Though he is an atheist, he is now praying to God that if Reliance reaches his cost price, he will exit and will never make the same mistake again of not honoring the SL.

Reliance shares do not recover and Raman ends up selling his positions with a whopping 20% loss in his account.

So the first lesson is to always keep the SL in the system and not to interfere with it.

2. Do Not Carry Your Intraday Losses

I am telling this from my experience, after making and losing a lot of money in the markets.

That carried losses of intraday trades are more likely to give you more losses than profits.

So, if you are taking an intraday position into any stock, and it doesn’t perform to your expectations, it is better to exit with the loss at the end of the day.

Otherwise, be ready for a 10X more loss than that you would have made by exiting the loss on the same day.

3. Get off Your Screen

Though this advice may sound the opposite of that, you should have more screen time to gain more experience.

But, In my opinion, once you are in a position and you have placed the SL order, then there’s no need to watch the screen, especially if you are trading on time frames greater than 15min.

Let’s say you are in a trade and you keep glued to the screen to watch every movement of what your stock is doing after your entry.

Your position is going well and is up 3% from your entry.

You plan to Trail your SL with every higher low.

But then suddenly a Big red candle forms on the chart, and you exit in panic.

Though it was not part of your plan to exit before the TSL or SL hits.

So, you did not follow the plan because you are Reading “PRICE ACTION”

Now, just after your panic exit the stock moves back to the highs and closes the day with a whopping 10% move.

4. The Bigger the Losses the Harder it is to Recoup Them

A 5% Loss only needs a 5.3% gain to break even.

But, A 50% loss needs a 100% gain to break even.

And that’s what you have to keep in mind always.

We have seen many times stocks dropping 30-40% intraday.

Below are the two examples, when stocks fell 30-50% intraday, and one Wrong trade like this could wipe your account if you don’t cut your losses.

5. Don’t take Uneven Risks

Most of the time an average trader (Let’s call him Joe) ends up with more quantity when he is wrong and less quantity when he is right.

Why?

Because of uneven Risk-taking.

Sometimes he risks 1% on trade and the other time he risks 5% on a trade, based on his intuitions.

Let’s see how taking uneven Risk can ruin your capital, even if your analysis is correct

Let’s say his system has a win rate of 50%.

And this is the sequence of win and losses of his last 10 trades

The above Trading system looks profitable, Right?

As the win rate is 50% and he made about 3.7 R profit in 10 trades.

But wait, Joe has one problem, he keeps on changing the Risk on every trade, sometimes he risks more and sometimes less, depending upon his “CONVICTION”

So, let’s see how much he risked on these trades

So as you can see because of his conviction he risked more in some trades and less in others.

Due to this, his Total P&L % is negative 3.35%.

He would have made 3.7% returns if he had kept the risk 1% at every trade.

So, now you know it’s not a good idea to change the risk at every trade, otherwise, even a positive expectancy system can not perform well.

6. Make Rules For Your Exits

Not having any pre-decided exit rules is one of the reasons that Trader can’t hold their winners longer.

For example, you can make a rule to exit the trade when the stock closes below the 20 EMA.

Or, Exit when the stock breaks the Higher low sequence.

Or any Exit rule like that.

Having a Rule for your exits is better than exiting the trades intuitively, as when you have a rule, you have a sense of predictability and you will have consistency in your trades.

Find what type of exit works best for your trades and then just follow that sincerely.

If you follow all the things that are explained in this article, you will see a big change in your Trading results.

That’s all for today from my side.

Thanks for reading 🙂

Trader knight