“Cut Loss” Strategy

[FCGY]

What arouse me to write about this?
Some people have asked me (at different point in time) whether do I adopt or ever apply a cut-loss strategy. In addition, I have witnessed several “applications” of such a strategy ~ some wise, some irrational.

To begin with, a cut-loss is needed when an anticipation of an investment or trade turns unfavourable. We should invest/trade when we are “convinced” by certain aspects of a particular counter, be it from technical view or fundamental view. It can be an anticipation of a breakout, reaching support level or a perception of under-valuation. We only act on the pre-determined cut-loss when things deviate from anticipation. If the situation is still within your expectation (which you should have before buying), why cut??

Correct or Wrong Decision
Whether the decision to cut loss is correct is not measured by the sole aftermath of the decision i.e. “Heng ah.. I cut and it goes lower” or “Sh1t! Should not have cut”. This “short-term” measurement is simply too silo. A strategy can only be more accurately measured in a longer term i.e. after several trades over a period of time. The acid test is only then. For example, since March low till now (STI about 2700), what is your net P/L? If you (typical longist) have not make profit (assuming active trading/investing) since then till now, most probably there is something wrong with your strategy.

Cut loss to protect capital is correct, but cut loss to protect capital so that it enables you to “chase” another counter is wrong. After a trade often comes temptation. “My counter is not moving, others are!” This can become a vicious cycle.

Variables
There are variables that will directly or indirectly affect your probability of success. These include your tolerance level and risk appetite, which is largely determined by your available resources. Patience can be another determinant. Timing, transaction costs and entry price are other factors. Besides, discipline is needed so that there is sufficient consistency for purposeful evaluation later. Having said these, I advocate that recipe (strategy) for success cannot be repeated identically and consistently. Learning from others is very important, but adaptation is also an absolute necessity. Cinderella and PPG adopt cut loss when necessary, but they are not identical in their strategies.

Disclaimer
Be aware that distasteful results may not be due to faulty strategy alone. It can also be a case of wrong analysis or selection criteria.

I am not advocating i have good cut loss strategy or that a strategy will work forever. In fact, I personally do not believe such a thing as “best”. By its definition, “best” will mean the highest possible attainment even by future standards.

I simply buy and hold because the reasons for buying those counters have not changed.

[kkworks]

Impressive... every different trading style should have its own set of limits to minimise losses and maximise profits..its not easy to master this as everyone is different. Most importantly, find one strategy that you can gain most out of it?

[PPG]

Hmm I think there's no fixed rules to this.

It depend on the individual risk tolerance. Out of every cut loss trades I have, I would say it's a 50-50.
50% for OMG-I-should-not-have-cut,-it-rebounded-tmd's and 50% for the Heng-ah!'s
But if one is a day trader and wants to free up capital fast and move in and out of trades, it is best to have a trading system with your own trading rules and stick to it strictly.
For me, I cut losing trades fast, while for winning trades I just let it run, with profits locked in step by step along the way.
As again, I think it was Alexander Elder who advocated: always protect your trading capital, so not lose more than a fixed percantage on your trading capital on a single trade any one time.
If it exceeds your this-is-the max-shit-i-can-bear, cut the losing trade and move on. For a good night sleep.

[FCGY]

Hmm I think there's no fixed rules to this.

It depend on the individual risk tolerance. Out of every cut loss trades I have, I would say it's a 50-50.
50% for OMG-I-should-not-have-cut,-it-rebounded-tmd's and 50% for the Heng-ah!'s
But if one is a day trader and wants to free up capital fast and move in and out of trades, it is best to have a trading system with your own trading rules and stick to it strictly.
For me, I cut losing trades fast, while for winning trades I just let it run, with profits locked in step by step along the way.
As again, I think it was Alexander Elder who advocated: always protect your trading capital, so not lose more than a fixed percantage on your trading capital on a single trade any one time.
If it exceeds your this-is-the max-shit-i-can-bear, cut the losing trade and move on. For a good night sleep.

It's not about winning trades vs losing ones or how to make profit. The reason for cutting is the focal point here.
My rationale is if one is inconsistent in his/her cut loss for, one will probably suffer:
1) inability to measure accurately on the cut loss strategy
2) high transaction costs in 50~50 cases..

[PPG]

Heh.. ok i see your point now.... Let me re-phrase it......
The gist is in the difference:-
- If being a FA-based investor (like in your case), you would tend to look at the reason.
- Being a TA-based trader (like for me), I go in a trade not caring much about the fundamentals (since it is short term usually 1-2 days), there is no need for a fundamental reason.
TA/ chartists mainly follow the trend/ charts/ news and don't really look much at the fundamentals.
So, I would say it's a different perspective.

[FCGY]

I love ur cat pic!! really v cute... every time see also make me smile de..

PPG, even if it's TA-based, u will also have some guidelines on cut loss right?
for example, 1 to 3 bids loss, or based on signs of breakout failure, or by timing i.e. intraday ~ 3 days ~ or 1 week, etc..

I mean if there is a need to measure effectiveness and results of the cut loss strategy, one would set disciplined "guidelines" so that the evaluation at a later stage can be meaningful? Evaluation is necessary mah.. else how one knows whether the cut loss strategy helps in the overall trading strategies and P/L..

Cut loss is just one of the many processes / strategies one will adopt in trading/investing..

[lizardtrader]

just my view

FA/TA/LA simply works well in a bull run
For FA,.u need just Holding Power
For TA,..u need just Discpline
For LA,..u need just Luck

Cut loss in any trade depends on ur appetite on how much you are willingly to lose for the trade
Of coz,the minimum the better

Always trade with ur own personal analysis...set your own Target price
No one know your risk more than yourself..

enough of my rubbish posting/

[fishingkakis]

just my view

FA/TA/LA simply works well in a bull run
For FA,.u need just Holding Power
For TA,..u need just Discpline
For LA,..u need just Luck

Cut loss in any trade depends on ur appetite on how much you are willingly to lose for the trade
Of coz,the minimum the better

Always trade with ur own personal analysis...set your own Target price
No one know your risk more than yourself..

enough of my rubbish posting/

I haven learn to cut loss 1 bid below where I am buying, this needs to be carefully crafted because u must buy as low as possible during short term trades, preparing for the swing. the killer problem is that trading in STI , I have to pay very high brokerages. this is 1 main problem killing short term swing traders

[camelshuan]

good .

[xywing]

Must learn technique for traders