Chapter 1: The Art of Cutting Losses ①

Hope you’re all doing well.

This is Nobushi.

As I mentioned in the prologue, in this series I’d like to delve deeply into the risk management skill of cutting losses, which I value most after fighting the market for ten years.

I’ve seen many methods introduced so far,

and usually the explanation starts with entry rules, which is only natural, isn’t it.

I don’t think that’s wrong in itself, and it’s also correct as a trading sequence.

This time, it’s the complete opposite, so I’ll start withloss-cutting first.

For example, when you’re forced to eat something you’ve never eaten before, you first check whether it’s safe to eat, right?

You’d try to understand what risks there are after you’ve eaten it.

Before investigating those, you wouldn’t normally look for the nutritional value of the ingredient and its merits.

First you doubt whether it’s something you can eat, and you try to learn the risks of eating it.

But in trading, many people first think about the profit target, don’t they.

“Feels like it could go up,” “feels like it could go down,” “if it rises this far I’ll take profit,”

and so on, they try to think from the convenient angle first.

Of course, you can’t have a 100% win rate in trading.

That’s why you need the skill to prepare for losses as something that will happen.

Now, some of you who think, “You got the point about loss-cutting, so please move on already.”

Rest assured.

Let’s talk about the skill of cutting losses!

First, when deciding the loss-cutting point, the important thing

is not to decide based on personal convenience

This is quite difficult, and many people

make it at the limit of their own funds… (if I lose a certain percentage of total assets…)

or

psychologically, this is my limit… (it suddenly moved against me and I’m scared…)

are imposing their personal preferences on the market.

The market moves while ignoring personal preferences, so you must not set your loss-cutting points based on personal convenience.

The correct way is to set loss-cutting points according to market conditions.

There are several ways to determine loss-cutting points based on market conditions, but

a simple method is when it exceeds the most recent high or low, when MACD reverses, or when moving averages cross, perhaps.

Anyway, decide from the signals the chart gives.

“No, but if I decide that way my planned loss width would be minus 100 pips.”

In those cases, you simply don’t take the entry in the first place.

That very thinking shows you’ve already absorbed an entry-first mindset.

Loss width naturally changes from moment to moment, and sometimes you can’t clearly determine a negative number of pips.

Since the market is a living creature, this is inevitable, and there are more times when you can’t fix the loss amount at entry.

For example, the loss width around MACD reversal can be somewhat predicted but not fixed.

If you want to fix it, cut at the most recent highs or lows.

And if you can’t endure the loss width, even if you feel there’s a good entry opportunity, you must skip entering.

There is risk that doesn’t justify the potential profit, so you shouldn’t ride it.

That’s a skilled way to give up.

Interacting with the market based on personal preferences leads to poor outcomes.

Aim to approach the market mechanically, in a cold, inorganic way.

I think that is the first step toward becoming a trader.

Next time, I plan to explain in detail how to place loss-cutting in the market and other related topics.

Please look forward to the next issue as well.

Nobushi