Tim Sykes says over and over again to “Cut losses quickly”. It’s his Rule #1. Though he has many rules to trading like: Don’t chase, Don’t hold and hope, Don’t try to guess the top, Never try to predict earnings, Focus on stocks making new highs, Always look for tops, ALFSS, KISS, etc. I have not heard him explicitly state what “Rule #2” is. Why? It is likely because none of these other rules carries so much weight over another quite like “Cut Losses Quickly” does. With that said, I’m here to write about cutting losses quickly; more specifically, Protecting Your Blind Side.
I am still a new trader, so take my writing with a bit of caution as I am not some sort of guru. I don’t pretend to be. I am just a guy learning this system and regurgitating my experience/education as a means of solidifying it in my own head. If you get something out of this post, that’s fantastic. If it does nothing for you, I hope I have something meaningful for you to read in the future as I gain more education and experience.
I am currently 6 months in to working on Tim’s trading plan and roughly 3 months in to trading with real money. I am reviewing my trades over the last ~2 ½ months and I am happy to be seeing some growth in my trading. I am seeing more winning trades happen and I am seeing the percent gains on those winning trades increasing, but there are a few trades I have made in the last couple months that I am not pleased with.
Attached is an image of my trading journal detailing my trades. All of these trades are detailed on Profit.ly showing my mindset getting in to the trade, throughout the trade, why I got out and the lesson I learned about the trade. I also have the chart of each trade posted so I can go back to review the setup and see where I went right or wrong. Again, I do this for me and my education, but if you can learn from it that makes it even more worth my while.
When reviewing my trades I can see my gains over the last 3 months gradually increasing and I can see that my losses were pretty well controlled. In general, I would say that I “cut losses quickly”. BUT… there were 3 trades where I didn’t cut losses quickly and it has cost me a lot of money (relatively speaking). The three trades are VTVT on 1/25, TNXP on 3/08 and CRIS on 3/25. They are highlighted in yellow. These 3 trades total up to a loss of $942.50 (after commissions and regulatory fees). In the grand scheme of things I’m not going to fret over losing $942.50. I will make it back 1000 fold if I stick to my education and dedication to following the rules. What concerns me more is the percentage size of those losses. Those 3 trades have an average loss percentage of 6.02%. The average percentage loss of my other 11 losing trades calculates to 1.19%. This means that those 3 trades I let slip over 5 times greater than the other 11 trades. Had I cut my losses as quickly as I did for my other 11 trades, I would have only lost $186 on these 3 trades and my account would be $750 richer.
Now, why do I bring this up if I don’t care about losing the $950? It’s because as I begin scaling up my position size, the dollar value loss increases with that scaled up position. I’m only taking position sizes between $2-5K right now, but what happens when I am taking position sizes of $20K? In this scenario I’m not losing $300 on a bad trade, I’m losing $1200. That is too much money to lose on a trade, in my opinion. Wouldn’t you agree that it would be much better to only lose $238 on that trade by cutting my losses quickly?
So, why do I say this posting is about “Protecting Your Blind Side”? Well, it’s because I see a lot of people (generally new traders and/or traders who are not trading with a lot of money) in the chat room getting in to positions mentioning that their risk is 15 cents. Well, a 15 cent risk may be fine on a stock that is trading at $6 (it’s a 2.5% risk), but I see these people risking 15 cents on a stock that’s trading at $2.25. That’s a 6.66% loss they are willing to take if the stock doesn’t go their way. Realistically speaking, a 6% loss on a $700 trading position is only $46. You may think that losing $46 is no big deal, and ultimately I agree that losing $46 is nothing. BUT… if you are someone who is willing to risk 6% to the downside on your small position trade today, you are blind to the poor habits you are creating so early in your trading career. Its okay to lose $46 on a trade, but it is not okay to lose 6.66% on a trade. On a $5K trade that is a $333 loss. On a $10K trade it’s $666. On a $20K, $50K, or $100K position it’s a loss of $1,332, $3,330, or $6,660, respectively.
You need to Protect Your Blind Side by thinking about the future of your trading and making sure the habits you are creating today will benefit your trading in the future. You may be able to lose 6% on your trade today, but in the future you can not afford to risk losing 6% and expect to be a successful trader. Do not get comfortable taking such large risks despite their small dollar loss amount. Do not get comfortable holding trades that do not go according your plan just because they haven’t hit your risk level. If they aren’t going to your plan, get out. Do not be blind sided in the future by the poor habits you are unknowingly creating today.
Think about your future self and Protect Your Blind Side.