Cut Your Losses Short

When you make a trading decision, you should feel absolutely confident that you are right, but you must also recognize that the market can prove you wrong. In other words, you are absolutely right until you are proven wrong. Consequently, you have to trade by rules and principles that take precedence over your feelings or wishes. Whenever you buy or sell any market, you have to ask yourself, “At what point will the market prove that I’m wrong?” Once you establish that point, nothing should stop you from closing out when the market hits it. This is the basis for the rule: cut your losses short. Violating this rule is the single biggest reason that people lose large sums of money in the financial markets. It is a curiosity of human nature that no matter how many books talk about this, saying the same thing in different ways, people still keep making the same mistake.