William O’Neill lays it down clearly and simply:
“Some people say, “I can’t sell that stock because I’d be taking a loss. If the stock is below the price you paid for it, selling doesn’t give you a loss; you already have it.”
If you don’t get this it’s probably best for all concerned that you stay away from the markets and if you must be involved give your money to someone who you trust understands this.
Often I think we overcomplicate trading. All this talk of risk management, money management, entries, exits etc ad nauseum can leave us not being able to see the wood for the trees.
It’s obvious that you need to cut your losses. If you let them run or get out of control your aren’t going to be in the business for long.
But there is another very good and often forgotten reason why you should not let your losses run that William O’Neill highlights:
O’Neill “letting your losses run is the most serious mistake made by almost all investors” simply because “if you don’t sell to cut your losses when you get into trouble, you can easily lose the confidence you’ll need to make buy and sell decisions in the future.”
But if you learn to do this then you stand some chance of doing this:
“Take your losses quickly and your profits slowly” because “your objective is not just to be right but to make big money when you are right.”
The first quote is another great one to heed. If we do and combine it with the second well…… we might just be able to make the big money once in a while.