How To Keep Your Losses Small

Keeping your losses small in the stock market lets you keep money in your account when you are wrong. Getting out of bad trades lets you live to fight another day.

So how do you go about cutting your losses? Here are three strategies that are very helpful.

1. Not 100% in one trade

I never put 100% of my account into any position, because you so not know how that position will do. It could gap down big tomorrow, and if it does I do not want my account going down with it. So if you do not want 1 stock to decide whether you are going to make money or lose it, it is normally a good idea to have multiple trades going at the same time.

2. Placing a Stop

Placing a stop to tell you when to get out if you are wrong is so important. I know that stops have kept me from taking big losses in the past where I would have otherwise held onto a losing position until I really felt the pain.

The great thing about stops is that it allows the trader to estimate how much they are risking on the trade. If they are using a target it also lets them figure out how much they can possibly make vs how much they are risking.

3. Use a percentage rule

It can be a good idea to have some sort of a percentage rule. For every trade you take you are risking 2% of your account, or 5% of your account or some other small number. This way you know how much to buy when you enter a trade and you can make sure that any losses you do have do not cripple your account.

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