(Practical Report) Explaining Why My Assets Increased After Strictly Following the Cut-Loss Rule
【Practical Report】 Explaining Why Increasing Assets After Thoroughly Enforcing a Cut-Loss Rule
Overview of this Article
This article explains, with concrete cause-and-solution details based on actual trading experience, the common beginner problem of “I can’t cut losses.”
As a result of strictly cutting losses, the profit and loss turned positive. This will be explained systematically from the perspectives ofpsychological background, rule design, and money management.
1. Root Cause of Inability to Cut Losses: Prospect Theory and Trading
To understand “why you can’t cut losses,” Prospect Theory from behavioral economics is useful.
According to Kahneman and Tversky’s research, people feel the pain of losses about more than twice as strongly as the joy from equivalent gains. This is called the “loss aversion bias.”
Applied to FX trading, the following occurs.
- A strong psychological resistance to turning unrealized losses into realized losses
- Reliance on hopeful expectations that “it may come back if I wait”
- The assumption that cutting losses is the same as “trading failure”
These are not a matter of personality or experience but originate in human cognitive structure. In other words, unless you consciously design rules, anyone can repeat the same mistakes.
2. Real Trading Records: Profit/Loss Trend During the Period When Loss Cutting Was Not Possible
Looking back over the first three months of trading, the following pattern repeated.
| Situation | Action | Result |
|---|---|---|
| Unrealized loss -3,000 yen | Holding on with “it will come back” | Losses expanded |
| Unrealized loss -15,000 yen | Continued because “I can’t cut here” | Approaching liquidation |
| Unrealized loss -38,000 yen | Forced liquidation | Two months’ worth of profits wiped out |
Characteristics of this period:
- Average profit on winning trades: about 4,500 yen
- Average loss on losing trades: about 21,000 yen
- Win rate was about 55%, yet the total was negative
Even with a high win rate, losses dominated because the “size of losses” greatly outweighed the “size of wins.”
3. Loss-Cutting Rule Design: Three Practical Approaches
Approach 1: Set Loss Cut Line Based on Entry Reasoning
Set the loss-cut line not by a fixed pips amount but based on technical justification.
Specifically, prioritize the following criteria:
- Just outside recent lows/highs: If support/resistance breaks, the entry reasoning disappears
- 1–1.5× ATR (Average True Range) Dynamic loss-cut width aligned with market volatility
- Outside horizontal lines and trend lines: Use technical turning points as the basis
What’s important is to decide “where to cut losses” before entering and place a stop order simultaneouslybefore entering.
Approach 2: Position Sizing Calculation Using the 2% Rule
After setting the loss-cut line, calculate “how many lots to enter.”
The formula is as follows.
Allowable loss amount ＝ Account balance × 2%
Position size ＝ Allowable loss amount ÷ loss-cut pips ÷ profit/loss per pipExample: account balance 100,000 yen, USD/JPY, loss-cut 30 pips, 1,000 units ≈ 1 yen/pip
- Allowable loss amount ＝ 100,000 yen × 2% ＝ 2,000 yen
- Position size ＝ 2,000 yen ÷ 30 pips ÷ 1 yen ≈ 66.7 → 6,000 units
By calculating backward like this, even if the loss-cut line is reached, the impact on the account can be minimized.
Approach 3: Managing Profit/Loss Ratio (Risk-Reward)
After setting the loss-cut line, check the ratio to the take-profit target (risk-reward ratio).
Aim for at least 1:2 (e.g., if stop is 20 pips, target at least 40 pips) as a principle.
With this setting, even a 33% win rate can still be overall positive.
| Win Rate | Risk-Reward 1:1 | Risk-Reward 1:2 | Risk-Reward 1:3 |
|---|---|---|---|
| 30% | -40% | -10% | +20% |
| 40% | -20% | +20% | +60% |
| 50% | ±0% | +50% | +100% |
4. Performance Change Two Months After Enforcing the Rules
Numerical illustration of changes two months after introducing the three rules.
Loss-related changes:
- Maximum loss per trade: about 21,000 yen → about 2,500 yen
- Monthly maximum drawdown: about 65,000 yen → about 12,000 yen
Profit/Loss-related changes:
- Monthly net: from negative to positive (range +15,000〜+30,000 yen)
- Win rate: 55% → 48% (due to stricter entry criteria, a slight decline)
- Profit/Loss ratio: about 1:0.2 → about 1:2.3
Even though the win rate decreased, the overall result turned positive.This is the essential effect of enforcing cutting-loss rules.
5. Combining with Tools and EAs
For traders using EAs or tools on gogoJungle, please refer to the following.
If you are using EA (automatic trading):Most EAs have stop-loss features, butmake sure the drawdown tolerance setting is not excessive. It is recommended to regularly check this. Even if you rely on EA, if the fundamental design does not embed a loss-cutting mindset, you carry the same risk.
If combining with discretionary trading:Even when entering based on EA signals with discretion, the “2% rule” and “pre-entry loss-cut line setting” can be applied. Treat EA signals as one piece of reference information, and crucially set the final loss-cut line yourself.
Summary
Enforcing loss-cutting rules may involve the pain of “locking in losses” in the short term. However, in the medium to long term, it yields the following benefits.
- Clear loss limits, making it easier to maintain the account
- Through risk-reward management, even low win rates can be overall positive
- Trading becomes less influenced by emotions, raising the quality of decisions
As an immediate action, start by “deciding the loss-cut line before the entry and placing the stop order at the same time” in one step.
This article is based on the author’s real experiences and common trading methods. There is a risk of principal loss in FX. Please trade at your own risk.
Related tags:#FXBeginner #LossCut #MoneyManagement #RiskManagement #FXRules #CannotCutLoss