How to Close a Losing Trade?Cutting losses is an art, and a losing trader is an artist.
Closing a losing position is an important skill in risk management. When you are in a losing trade, you need to know when to get out and accept the loss. In theory, cutting losses and keeping your losses small is a simple concept, but in practice, it is an art. Here are ten things you need to consider when closing a losing position.
1. Don't trade without a stop-loss strategy. You must know where you will exit before you enter an order.
2. Stop-losses should be placed outside the normal range of price action at a level that could signal that your trading view is wrong.
3. Some traders set stop-losses as a percentage, such as if they are trying to make a profit of +12% on stock trades, they set a stop-loss when the stock falls -4% to create a TP/SL ratio of 3:1.
4. Other traders use time-based stop-losses, if the trade falls but never hits the stop-loss level or reaches the profit target in a set time frame, they will only exit the trade due to no trend and go look for better opportunities.
5. Many traders will exit a trade when they see the market has a spike, even if the price has not hit the stop-loss level.
6. In long-term trend trading, stop-losses must be wide enough to capture a real long-term trend without being stopped out early by noise signals. This is where long-term moving averages such as the 200-day and moving average crossover signals are used to have a wider stop-loss. It is important to have smaller position sizes on potentially more volatile trades and high risk price action.
7. You are trading to make money, not to lose money. Just holding and hoping your losing trades will come back to even so you can exit at breakeven is one of the worst plans.
8. The worst reason to sell a losing position is because of emotion or stress, a trader should always have a rational and quantitative reason to exit a losing trade. If the stop-loss is too tight, you may be shaken out and every trade will easily become a small loss. You have to give trades enough room to develop.
9. Always exit the position when the maximum allowable percentage of your trading capital is lost. Setting your maximum allowable loss percentage at 1% to 2% of your total trading capital based on your stop-loss and position size will reduce the risk of account blowouts and keep your drawdowns small.
10. The basic art of selling a losing trade is knowing the difference between normal volatility and a trend-changing price change.
