August 19, 2022

Coach’s Roundtable: When to Cut Your Losses

Every week, the coaches at Prosper Trading Academy offer their insight on some of the most challenging questions covering recent stock market developments, trading tips, and relevant news stories. This week, Scott Bauer, Charlie Moon, and Mike Shorr touch on the importance of continued education, and when it’s appropriate to cut losses.

You all host live training events that give students opportunities to learn some of your most effective stock trading strategies, and participate in Q&As. Why do you think it’s important for traders of all experience levels to attend these functions?

Charlie: The live aspect allows traders in on what we are seeing in real time. This will also allow us coaches to answer questions directly and immediately so the student can better learn/understand what we see. The purpose of what we do is to cut that learning curve greatly, and also try preventing the key elements that hurt new traders most – lack of knowledge and lack of planning.

Mike: One of my biggest challenges as an educator is “reading the pulse” of the room. By that I mean what level of trader am I talking to? If someone is brand new to trading or trading options and I am talking about the nuance of implied volatility, it will be meaningless. Conversely, if I am explaining the bid/ask spread to a veteran trader, I have wasted their time.

The way we get ourselves on the same level is by having a conversation. This can be accomplished in person or in a virtual setting. My style of teaching is not lecture-based. It is a discussion where everyone from the beginner to the expert walks away having learned something new. I try to learn or get better at something every day. Q&A at our live events accomplishes this very well.

Scott: Learning never stops. There are ALWAYS new methodologies or variations of time-tested ones to use in the marketplace. Since the market never trades the same day in and day out, traders need to have multiple approaches to take advantage of opportunity.

Although losses are inevitable, many stubborn traders abide by the “It’s not a loss if you don’t sell” or “HODL” (Hold On For Dear Life) mentality. When is it appropriate to hold positions you’re down on, and when is it best to cut your losses?

Charlie: So I am not here to help people hold long term in speculative stocks. I personally prefer higher quality names like $AAPL and $MSFT to accumulate for the long run. This all starts with a plan and value of where the stock’s peaks and valleys have been. Buy at lows and sell at highs. Too many people buy at peak. I would NEVER suggest buying into penny stocks and hope. They’re cheap for a reason. Target quality companies we use in our daily lives or important figureheads in our economy, and you generally can’t go wrong. Starting new investments at 5-year highs isn’t horrible, but instead, look for a pullback – even 10%. Would you buy a house at the peak of the real estate market? Or buy 10% above market value? Some may perhaps, but most will buy homes at value. Do the same with stocks.

Mike: Losses are inevitable. You don’t have to like it when you lose, but you better learn to deal with it.  You can only control what you can control. You do have control over your risk. I have said time and time again that the biggest indicator of the success of a trader is their ability to recognize and then willingness to realize a loss. It is simple, but not easy. It goes against everything our ape brains are hardwired to do. This is accomplished by setting stops and sticking to them. Small losses and much bigger winners are the path to profitability as a trader. Take a small loss and move on. That way you are not affected negatively financially nor psychologically.  

Scott: Losses ARE part of the program and accepting them is one of, if not THE hardest concept to understand. I prefer to keep losses at 50%, however, when trading options and using different expirations. The longer the expiration of my position, the more I’m willing to hold.

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