Cutting a loser and Mental Capital

“You never loose money taking a profit”, right? If you liked the stock at 100, you should love it at 90, and you should really love it at 70. Right? Wrong.


Cutting your losses. The biggest problem I have had in trading was delaying in cutting my loses, and being too quick to cut my winners. I don’t have this problem anymore.
Old thought patterns:
Losses filled me with “hopium”. I believe the sunk costs would return to me. Or I followed the old thoughts of dollar cost average (a load of bull, unless done correctly i.e. Dynamic Hedging).
If you liked it at 100, you should love it at 90, and you should really love it at 70. Right? Wrong.
If I cut my losses, and price reversed and would have eventually became a winner. I used to say, “see, I knew it was going to go up. It would have been a huge winner. Dumb, Dumb, Dumb”. If it keep going down i wouldn’t congratulate myself for being shrewd. Now I do congratulate myself as a good trader for sticking to my plan. Either way, profit or loss.
Old thought pattern on winners:
“You never loose money taking a profit”, right? wrong. With this philosophy, you may win the day, but you will loose the year. Ride you winners, within your system. I like to sell half of my position when I make a double, and I still see a favorable Reward:Risk situation for my remaining position. Or I will straddle my winning trade at a certain profit point.
The new realizations,
If I am 50/50 in my picking of trades. Then proper money management is a key component.
I look for reward to risk ratios better than 2:1, and many times 3:1 or greater. Also, cutting loses allows me to free up financial and “mental” capital for positive trades.

Mental Capital:
I found this to be the most important component in my trading. If I am riding a loss, where does my attention go? To losses. And if you believe in the Law of Attraction, like I do, then you also believe what you think about most often expands. In other words, you start to attract losses.

When I am focusing on my losers, I am not looking for other trades.
When, I am focusing on the losses, and I am tentative in pulling the trigger. I miss other good trades.
When I cut my losers at let’s say $300, My $1000 winner more than offsets the loss. I now can say, I am a good trader, even though I am still only 50/50. My focus is again on the positive.

Success begets success. In the past two weeks, i have had 3 losing trades for $X, and 6 winning trades for $4x. Regardless of X, that makes for a good trading stretch. However, even if it was 5 losers times $X and 4 winners times $3X, that would still make it a good trading stretch would it not?

In short, have a system that you believe in. One which gives you a better than 50/50 shot. Sent your exits before you, enter. “Exit your trade before you enter it”. Does the Reward:Risk favor you. Always ask, what happens if I am wrong, PRIOR TO ENTERING your trade. Then execute you plan, and trade to win the year.

DYNAMIC HEDGING
play- my first live DH strategy play
Here is a trade I just put my first level on today. SPF. I entered the stock @ 22.49 with 1 unit, and bought June 22.5p for protection. If it goes down to 20, I will sell the 22.5p, buy stock with the proceeds from the put and buy a 20p to protect the shares. (I will not dedicate more of my seed capital to fund the trade.) If it goes through 24 (resistance), I will put a new unit on and purchase the corresponding number of puts to protect the position.
For more information on this strategy, read Stock, Options, and Collars
The Risk – The stock doesn’t move and the put expires worthless.
The Reward – The goes up or down at least one strike price ($2.50)
Here is the chart:
spf%20chart.gif
Just before the close
I sold 1 of my 4 spread unit (8 contracts) of PDCO today. Made a double in 24 hrs!!! I am holding onto the rest until after they report tomorrow afternoon. I like playing those volatility moves before announcements (from my future daytrading days).
Final thoughs.
Have your own system that you believe in. We all get tempted by someone else’s tips and recommendations. When we buy based on these recommendations, without researching and designing our trade with Profit, Loss, Time, and special events exits, then we run the risk of focusing on the negative when the trade goes against. Don’t do it. Only if the trade meets YOUR criteria should you possibly take the trades. I look for reasons not to take the trade, as well as the reasons to make the trade.
Also, it is snowing very hard at the MKT close.
happy trading,
Jon
p.s. these are for education only.
Current positions:
AVY Oct 65-60p (vertical)
AIG July 75-70p (vertical)
CIEN Jun/Jul 30p (caledar)
EK Jun/Jul 25p (calendar)
JADE Oct 10C/10P (straddle)
PDCO Jun/Jul 35p (calendar)
SPF stock + jun 22.5p (Married Put/Dynamic Hedge)
TLAB June 10p (former calendar)

3 thoughts on “Cutting a loser and Mental Capital”

  1. Mental Capital: I found this to be the most important component in my trading. If I am riding a loss, where does my attention go? To losses. And if you believe in the Law of Attraction, like I do, then you also believe what you think about most often expands. In other words, you start to attract losses.
    How true in places beyond trading too. I need to start cutting lose some of the burdens that I carry around. It seems that instead of paying attention to the things that I enjoy and am doing well at, all the attention goes to the negative things no matter how insignificant.
    If you have 100 good things going for you and 1 bad, where does the energy go? Sometimes it is best to unload that one negative. I get too busy doing too many things and instead of cutting the less productive items, I double and triple down on them and dedicate more energy to them instead of cutting my losses.
    Good info and got me thinking.

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