The art of selling a losing position is a key skill in the science of risk management.
When you are in a trade that is losing money you have to know when it is time to exit and accept the loss. In theory stop losses and keeping your losses small are simple in concept but in practice there is both a science and art in selling a losing position.
Here are ten things to consider when selling a losing position.
- No trade should be entered without a stop loss exit strategy. You must know where you will get out before you get in.
- A stop loss should be set outside the normal range of price action at a level that will signal your trade is unlikely to work out.
- Some traders set a percentage stop loss, as an example if they are trying to make +12% profits on stock trades they set their stop loss at when the stock is down -4% to create a 3:1 reward to risk ratio.
- Other traders use time stops, if a trade is down but never hits the stop loss or a profit target in a set timeframe they will just exit a trade due to no trend and go looking for a better opportunity.
- If the chart of a position the trader is holding suddenly has a volatility spike against the trader many will exit on the expansion of the trading range signaling danger even if the stop loss isn’t hit.
- In longer term trend trades the stop loss has to be wide enough to capture a really long trend without being stopped out prematurely by noise but when the trend is likely ending. This is where long term moving averages like the 200 day and moving average crossover signals are used for wider stop loss exits. It is crucial to have smaller position sizes on trades exposed to bigger moves and large open risk in price action.
- You are in trades to make money not lose money, you should be concerned with any trade moving against you. Just holding and hoping your trade will come back to even to let you out is one of the worst plans a trader can have.
- The worst reason to sell a losing position is due to emotions or stress, a trader should always have a quantified reason to exit a losing trade. If stop losses are too tight you could be shaken out and every trade with a quick small loss. You must give trades enough room to breathe.
- Always exit a position when your maximum percentage of allowable trading capital is lost. Setting your max loss percentage at 1% to 2% of total trading capital based on your stop loss and position sizing will lower your risk of ruin to near zero and keep your drawdowns small.
- The primary art in selling a losing trading position is knowing the difference between normal volatility and a trend bending.
The biggest reasons traders are unprofitable is due to big losses, if you remove big losses from your trading you have a much better chance of being profitable. Set the limit of how much you are willing to lose per trade and never exceed that amount, this is the most important step in the art of selling. Everything else is managing volatility and position sizing.
Many times you have to give up on the cheese and just worry about getting out of the trap.