Stock Trading Tips – Cut Loss Strategy
Posted by admin on January 17, 2010 under Articles | 
Be the First to Comment
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.
Add A Comment