There is nothing worse than when a trade doesn’t play out how you’d planned. Whether you waited too long and missed your window for profit or the stock never gained the way you had anticipated – it can leave you feeling like a failure. But don’t sweat it – it happens to the best of us.
Even the top traders in the game experience losses. What sets them apart from the rest, though, is their ability to keep their losses small and infrequent. And for that, you need a deep understanding of when to cut losses on stock.
However, this is a very tricky topic for many traders. It’s all too easy to become emotionally attached to your position and cling on for any hope that things will turn around – but things typically only get worse in these situations.
That’s why today, we’ll teach you when to cut your losses on a stock using simple, tried-and-true stock trading principles. In fact, you can actually automate this process so you never stress about blowing up your account again. Let’s get started…
What Does it Mean to “Cut Losses” on a Stock?
You enter every position with the intention of earning a profit. It doesn’t always go that way, though. Sometimes you need to stomach the loss and close your position below what you entered. This helps you eliminate more costly losses from further price declines. This process is known as cutting losses on the stock.
Cutting losses is one of the most important principles when trading stocks, and one of the most difficult to put into practice. It’s natural to want success in every trade, but you can’t win them all – so it’s best to master knowing when to cut losses on a stock before any further damage is done. But why is figuring out when to cut losses on stock so difficult for new and seasoned investors alike? Let’s discuss the psychology behind taking a loss…
Why Do So Many Investors Struggle Understanding When to Cut Losses on a Stock?
For some, the fear of loss is greater than the hope for gain. This can cause one to hold onto a losing position too long and lose more money in the process.
In addition, greed and pride are two very powerful emotions that can really mess with your trading game. Investors often get overly optimistic about their investments or become so attached to their stock that they find it hard to let go and accept a loss – even if all signs point towards it being necessary.
But no matter what you do, understand this: there will always be losses in trading! That’s why understanding when to cut losses on a stock is so important – it helps you stay ahead of those inevitable losses.
The key is to cut losses early before they stack up too high and really put a dent in your account. And, there are ways you can keep your losses as infrequent as possible – which we’ll discuss later on. First – let’s address the main question you came here with. When should you cut losses on a stock?
So – When Should You Cut Losses on a Stock?
So – when should you cut losses on a stock?
When to cut losses on stock doesn’t necessarily have a one-size-fits-all answer. That’s because your specific trading strategy dictates the degree of loss you’re comfortable stomaching – and how speculative you’ll be in monitoring positions.
For some, a 2% loss is all it takes to close out a position and live to fight another day. Others will take on as much as a 10-15% loss before finally coming to terms with their reality and putting an end to the madness. A good rule of thumb that most investors live by is to cut losses anytime a stock falls 5-8% below the price you purchased it at.
The most important thing to remember is that the earlier you accept a loss, the more money you’ll save in the long run. As traders, it’s our job to protect our portfolios and ride out the waves of uncertainty – and cutting losses when appropriate is one of the best ways to do so.
Cutting your losses early on allows you to move on from failed investments and put your capital towards better-performing stocks with higher ROI potential. In some cases, this could mean making a profit that ends up recovering any loss you incurred!
Now that we know when to cut losses on stock – let’s talk about how to make this process easier.
Tips to Help You Get Better at Cutting Losses on a Stock
There are four pieces of advice we want to offer you to assist you in cutting losses and not letting your emotions get in the way of logic:
- Set Stop-Losses
- Take Profits When Possible
- Don’t Get Attached
- Invest in Helpful Software
Set Stop Losses
A lot of the time, someone loses more than 5% on a trade simply because they’re attached to the stock and expect it to turn around at some point. But sometimes, this happens because you were late to the party and missed your opportunity to get out earlier. This is why every position you enter should be set up with a stop loss. In fact, this is one of the best stock risk management tactics you can employ.
This is a trigger you can set within your platform to execute a sell order anytime the stock in question falls below a certain price. You’ll set this stop loss according to your specific strategy. If you’re a very conservative trader, you may set this stop loss at 5% – while more speculative traders who are willing to risk more can set this as high as 10%.
Similar to how you can automate the cutting of your losses, you can set up take-profit orders that trigger when the stock in question rises above a certain price. It’s important to take profits when you have a good run – without letting greed cloud your judgment and cause you to miss your opportunity.
Stocks ebb and flow – you can enjoy seriously profitable trading by just riding the small 5-10% wins along the overall trajectory of a stock’s price movement. You don’t have to hit a home run every time – those small wins add up. And by setting up these orders to trigger from the moment you enter your position, you can eliminate human error or emotions from getting in the way.
If you really want to keep riding a good run, you can still hold the principles in the stock – just take out any swing trading profits you’ve earned.
Don’t Get Attached
Perhaps the most important rule to assist you in cutting losses on stocks is to remain unemotional. Don’t get attached to any stock you’re invested in. Even if a stock has been good to you and you’ve made a good chunk on paper, it means nothing until you’ve closed your position and actualized that profit. Remember – stocks do not reciprocate the emotional attachment you have!
This is something all investors struggle with at some point. But you can always buy back in if there is more room for the stock to climb. You’ll just need to keep up with market timing – riding the wave up, getting out as it begins to reverse, and getting back in when signs point to a positive trend forming again. But to really pull this strategy off, you need to set yourself up for success with the right tools. That’s where VectorVest comes in.
Invest in Software to Help You Keep Wins Big and Your Losses Small (and Infrequent)!
What sets those who enjoy a high swing trading success rate apart from those who struggle to earn a profit in the long run? The way in which successful traders invest in themselves.
Sure – keeping up with the best indicators for swing trading is important. You also need to know how to follow moving averages for swing trading and what time frame for swing trading is best. However, it could all be so much easier with VectorVest. Our stock market analysis software
will transform the way you invest. Here’s why…
VectorVest’s Market Timing Indicator Helps You Time Your Entry & Exit to Perfection
The system relies on a proprietary stock rating system that allows you to simplify your process for uncovering and assessing stock opportunities. With just three ratings, you can learn everything you need to know to make a calculated play. And most relevant for today’s discussion, it can help you with when to cut losses on stock. This is due to our market timing indicator: relative timing (RT).
Relative timing takes a look at a stock’s price trend. It’s based on the direction, dynamics, and magnitude of that price trend – and is calculated day over day, week over week, quarter over quarter, and year over year. It’s put on a scale of 0.00-2.00 – with 1.00 being the average. Stocks with an RT rating that’s rising above 1.00 have a positive price trend – while stocks with a falling RT rating under 1.00 exhibit a negative price trend. By staying up to date on a stock’s RT rating, you can watch in real-time as price trend fluctuates – and never stress about incurring hefty losses again.
With this indicator, you can eliminate any human error or guesswork from your strategy. You’ll be able to get into positions at the perfect time and exit them with a profit – or when necessary, cut losses early to maximize the preservation of your portfolio. And, you never have to worry about missing the memo – because you can take this strategy on the go with our stock advisory app.
ProfitLocker Pro Helps You Automate Your Trading Strategy With Dynamic Trading Stops
The capabilities of VectorVest are vast. Not only does it help you time the market, but it helps you discover winning opportunities on autopilot through pre-curated stock screeners. It also helps you gauge market sentiment at any time so you know when market conditions are favorable, and when you should exercise caution.
However, if you’re just looking for software that will help you know when to sell stocks, ProfitLocker Pro is exactly what you need. This intuitive software will prove invaluable as part of your lock-in profits strategy. You won’t deal with 4 of the most difficult realities of trading stocks:
- Watching winners turn into losers before you have a chance to capture profits
- Taking profits too early and missing out on additional profits
- Holding onto losers and watching them become BIG losers that blow up your trading account
- Setting stop losses too tight and watching stocks blast off right after you sell them.
We encourage you to take a look at how this software can assist you in protecting your profits, earning bigger returns, and minimizing gut-wrenching losses. It can integrate right into your brokerage account for effortless setup.
Final Thoughts on When to Cut Losses on Stock
Failing to recognize when to cut losses on stock can lead to costly account blow-ups. There can be a huge opportunity cost of delaying the inevitable outcome of cutting losses, too. While you’re waiting for that falling stock to come back up, you could have made up your losses and then some on other stocks that were on the rise. For more information related to this topic, check out our articles on how to swing trade stocks, how to find swing trading stock picks, or how to analyze a stock before buying.
We hope this article cleared up the topic of when to cut your losses on a stock. With the help of VectorVest, you can effortlessly time the market and get in and out of your positions at the perfect time. See it in action with our free stock analyzer here – you’ll never look at trading the same again!