Why You Must Cut Your Losses To Win

“No one should be ashamed to admit they were wrong, which is but saying, in other words, that they are wiser today than they were yesterday.” - Alexander Pope

Rationally we all know to do this. But emotionally, it’s hard to admit defeat and cut your losses.

The action of cutting losses is never easy. It takes a highly unemotional mind to do so and as humans - emotions is our innate nature.  In this article, I share my perspective on how I learnt to cut my losses.

Tip #1 - Losses are inevitable.

The fact that you even have losses in the first place, is actually a blessing.

"What. Are you crazy? Losses are blessings?"

Here is why.

"The only people who have never lost, are those who have never tried. And from that aspect, they have already lost from the start."

This means that the fact that you have losses, suggests that at some point of time, you have made the commitment to step out of your comfort zone to take the first step.

And this alone, separates us from many others.

Many people simply stay in the sidelines, forever watching, and never suffered a "loss". But by that default, they have never enjoyed a win either.

If you take a look at the journey of growth - you would realised that it is never a smooth journey.

In the above figure, it show the journey of growth.

We start with (1) goals and inevitably, we will face (2) problems. These problems are great - because it forces to grow into the person you need to be to achieve your goals. You then (3) diagnose these problems and (4) design solutions to overcome these problems. There will be times that these problems are tricky, and you go through several iterations of the diagnosis and design. But eventually, you manage to (5) do it and continue to set your next level goals.

Tip #2 - Have Properly Defined Rules

As you develop yourself in your journey of growth, you eventually developed a set of principles.

1. Make a brutally honest assessment of your winners and losers. Expect three categories: clear winners, clear losers, and yet to be determined.
   
   
2. Cut your losses on the losers. Shut them down before they become a tumor that is hard to recover.
   
   
3. Redeploy your resources to the winners. Accelerate and invest more in winners.

I need to emphasize this. You need to be very sharp in the principles for cutting your losses. This is also why I make sure that the rules when cutting losses for options is properly established.

By setting properly defined rules, it ensures that there is no ambiguity in your decision making process. But that said, it is also important that you refine your rules along the way - remember the success loop you see in the above figure. Always diagnose and design your rules to adapt to your evolving circumstances.

Tip #3 - The Subtle Benefit of Cutting Losses

Cutting losses is much less painful than not cutting losses.

By not following the rules you have previously established, you start to adopt a gambler's mindset. From a trading point of view, you are effectively gambling instead of trading.

And it is very hard to recover from the huge losses incurred due to a lack of action.

From a trading perspective, imagine if you did not follow your cut loss rules, and it amount to huge losses. Think about how many more successful trades you need to have just to recover that loss.

More importantly, not cutting losses will really mess with your psyche. And you begin what we call "revenger". You take revenge by taking higher risk actions with hopes to cover your losses quickly. You lose your principles and slowly become a gambler.

This is why I say cutting losses is much less painful than not cutting losses - because of the person you will slowly become. A gambler.

And sooner or later, you lose confidence in making decisions. Your personal life may also be affected.

So please - learn how to mercilessly cut your losses.

Conclusion

Many of the principles I have explained above, can not only be applied in life - but also applies to trading as well.

If you are interested to find out more on the framework of Options Cash Flow Mastery Course - you can find the details of the program down below.