There are a lot of phrases and sayings in the world of finance that can be confusing for beginners. One such phrase is "cut your losses and let your winners run.". So, what does this mean, and how can it help you become a successful investor?
In this article, we will discuss what this phrase means, and when you should use it.
What is the meaning of "cut your losses and let your winners run"?
In trading, there will be times when you are up on a trade, and times when you are down. It is important to know when to take your profits (or "winners"), and also when to cut your losses (or " losers").
The phrase "cut your losses and let your winners run" means that you should exit trades that are losing money, and let trades that are making money continue to run. This is easier said than done, of course.
One of the major proponents of this approach was the legendary trader Jesse Livermore, who has a specific quote that reminds traders of the importance of cutting losses early.
“The only thing to do when a person is wrong is to be right, by ceasing to be wrong. Cut your losses quickly, without hesitation. Don’t waste time.”Jesse Livermore
Why cutting your losses and letting your winners run can be difficult
It can be difficult to take a loss because we always hope that the stock will turn around and we will be able to make back our money. And it can also be difficult to hold onto a winner, because we may be worried that it will go down and we will miss out on profits.
Taking quick profits can also be tempting as the closing bell approaches but if stock still has room to run, it may be best to let it continue. The news might let it keep going into the close or even throughout the week if you are a swing trader.
Being in the midst of trading activity can make it difficult to cut losses. However, if we can learn to take our losses quickly and let our winners run, we will be much more successful investors.
What does let your winners run mean?
Often traders might decide to take profits. This helps to take some risk off the table as the initial trade is returned. The problem with this strategy is that it can also result in missing out on even bigger gains.
Letting your winners run means holding onto a position even when it has increased in value. This can sometimes be a difficult decision to make, as there is always the potential that the position might decrease in value again.
However, if the stock continues to increase in value, then the trader will ultimately end up making more money.
When should I cut my losses on a stock?
If the fundamental story of the company has changed, then it might be time to cut your losses. This means selling the stock and realizing a loss, rather than holding on in the hopes that it will rebound.
If news breaks out about the company itself and it changes your trading strategy, then it might be time to sell. Cutting losses for day traders are done on short-term positions that don't work out. If a trade isn't going the way you want it to, get rid of it quickly rather than holding onto the hope it will turn around.
Be proactive and take the loss, so you can move on and find a winning trade. If it was purely a swing trade and the stock is no longer in an uptrend, then it might be time to sell even if you've lost some money on the trade.
It's important to remember that no one is right all the time, and even the best investors lose money on some trades. Tax-loss harvesting is another reason why you might cut your losses on a stock.
This is a strategy where you sell a security that has decreased in value to offset gains elsewhere in your portfolio. This can help to lower your overall tax bill. Speak to a CPA to see if this is something that would be beneficial for you.
Each situation is different, and you should always get the most accurate advice.
How do you cut losses in a short let profit run?
If it is a short-term trade, you might want to set stop losses at a certain percentage below your entry point. If the stock dips below that level, you will automatically sell and take your losses.
Letting your profits run means taking out your initial investment and only having profits invested in the market. This is a good way to maximize short-term gains while minimizing risks and potential losses.
By cutting losses quickly and taking money off the table when you're up, you can create plenty of short-term trading profits.
How do you let winners run?
One option would be to simply hold on to your winners until they reach your profit target. Once they hit your target, you could sell them and book the profits.
Another way to let your winners run is to sell a portion of your position when it doubles or triples in value. This technique is known as scaling out.
By scaling out, you still have a chance to participate in the upside while reducing your risk. The best way to let your winners run is to have a plan. Your plan should include your profit target and when you will take profits.
By having a plan, you can take the emotion out of the decision-making process. If you plan to let it run until the fundamentals change, make sure you have a system in place to monitor those changes.
When to cut losses on stock
If you are a short-term trader, you can cut losses as soon as the trend goes against you. If you wait too long, it can result in a much larger loss. If you are a longer-term trader, you can give the stock more time to come back, but if it doesn't, you should eventually cut your losses.
The phrase "cut your losses and let your winners run" is the best strategy for everyone. However, it can be a financially savvy move for those that know when to do it. It takes experience, timing, and knowledge of the market to be able to do this well. But if you can, it will save you a lot of money in the long run.
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