How Long Should You Hold A Position Before You Let It Go And Cut Your Losses?

Rationally deciding to exit a position and cut your losses is extremely tough.

As humans we naturally have a fear of losing and closing a losing position only reinforces that fear. Unlike winning trades, losing trades have a great impact on our emotions.

This could be the #1 reason why we tend to hold onto a losing position far longer than we ever should in the first place. We think that magically the market will reverse and our losses will turn into gains; and until we actually close the position we haven’t “really” lost money yet.

Oh the tricks we play on our own minds!

Know When You Should Have Already Exited

In my opinion, if you start to second guess and question the position you should have already been heading for the exit doors. Typically those “feelings” you have deep in your stomach will try to keep you in the position as you think to yourself, “it will turn around soon.”

How long should you hold on then? Only long enough to realize that the investment is not going to turn around. When you hope and pray more than anything else you should hit the sell button.

Remember the 14 stages of investor emotions? It’s the same cycle that’s played out time and time again with each of us. But I would rather see you live to fight another day. Take the loss and make adjustments for the future.

Forget What Happens After You Get Out

Sometimes after you exit a position you’ll watch it turn around and do exactly what you “thought” it was going to do. This is horrible for traders – beware!

When we see this happen we naturally think to ourselves that we were wrong and we knew it was going to turn around. We kick ourselves in the head and swear up and down that next time we’ll stick to our guns.

Don’t fall for this trap! This is horrible habit to get into because the next time could be the last time you trade if you blow up your account.

Whatever happens after you exit is a clean, fresh slate. You made a rational decision to exit (I hope) and now you have to re-analyze the market.

Learn From Your Mistakes, Keep Moving Forward

There is no right or wrong answer here but only the lesson that at some point bad trades will occur. Recognize them early and get ride of them. Keep making trades and learning from past mistakes.

The best traders know that hedging early and often saves thousands of dollars each year. Sure you’ll give up a little profit to protect you positions, but in the end it more than outweighs risk of letting losers drag you down.

What are your thoughts on this? What tells you when to get out of a trade; is it a price level, technical indicator, percentage?

  • Bill Place

    Yes, very hard to do, close for a lose. Gut is not alreadys right, but not a bad indicator

  • http://www.facebook.com/shilpi.chhetry Shilpi Chhetry

    stop loss is the key

  • http://www.facebook.com/aslamhammad88 Hammad Aslam

    i have controlled my losses many times…and after reducing my trading capital, i try sometimes to go with the trend. Sometimes this strategy will help. But remember nothing is 100% predictable in the forex market…Sometimes things do go around…But in that case i think we would need to use low leverage and have more stop loss gap…Like having 1000pips slop loss will buy you time to recover when the market reverses….But in the mean time you could try to hedge some pips along the current trend…This is also a difficult method as if you over hedge you’ll end up putting a sell position on a support level :p or if you over buy you’ll end up putting a buy position on a resistance point :p….And than your sell position or buy position will get stuck. If your using etoro for forex trading. You have ability to do money mangement meaning using 2.5$ x400 for the shorts…And x25, x50, x10, x5 for the longs positions. I have been trading for last 3years. Still have difficulty controlling losses. But i never gave up. Because i believed i could always win again. And i have, and still looking forward to continue trading :)