The statement of cutting your losses and let your winners run seems so logical, you would think that everyone should be rich by now.  Essentially this is the purpose of money management.  Why is cutting our losses quickly and letting our winners run such a problem among traders?  Why is it so hard to execute such a simple order?

My personal belief is that we are not wired to do such things.  Although it sounds rational, we as humans are not configured in a way to deal with problems immediately, in fact we like to avoid them, and when good things come our way we generally take them.  I believe it is a hard wired response to our survival instinct, and that is why there are so many unsuccessful traders out there.  The traders that do learn how to override these primitive responses are the those who end up with the fat bank accounts.  

This is why money management is so critical in your path of becoming a successful trader, because it forces you to do things that you would not normally do on your own.

Aside from good money management, you need to change your psychology about winners and losers, most importantly is the loser.  When you open a position and the trade moves against you, our natural tendency is to wait, to give it time, to avoid the pain.   Just remember that if most traders are losers than you need to be doing what is unnatural. 

The Small Loss

You need to love your loss, when you see a loss, you need to take it, close the position and feel great!  Why feel great?  because that small loss that you now have in your arms is much better than a big loss, it is way better than the loss that you are losing sleep over.  That small loss should be romanced, taken out to dinner and movie, because it has freed you from a losing position!  That small loss should be #1 on your speed dial.  Take your small loss out to the go-cart track once and a while, fell the freedom it has given you!

Every time you take a small loss you should remember what it feels like to take a big loss.  If you have been trading for any length of time, chances are you have fallen in to the big loss trap.  We all know how draining, disheartening, and painful a large loss is on our soul.  It steals a piece of us when we have to take it, it leaves with our money, ego, hopes and dreams.  Big losses are very serious animals, however a small loss is just a cute and furry puppy.  Appreciate your small loss and all that it has given you!

The Big Gain

The big gain is opposite of the small loss.  We need to avoid it, ignore it, pretend it doesn't exist!  The big gain is always screaming in my our face, "HEY, LOOK AT ME!!, I'M A BIG GAIN, CHECK ME OUT!!! I KNOW YOU WANT TO LOCK ME IN!!!"  We quickly look at the big gain and become fearful that the big gain might turn into a small loss.  That is a terrifying thought!  All our hard work down the drain, I had the chance to make some money and I blew it. 

Your gain must be treated like rude in-law that you never want to see.  It must be ignored and made excuses upon, so that you can avoid it at any cost.  When it calls you must hit the ignore button and insure that all correspondence is returned 'undeliverable.'   A gain is like a fine wine, it takes much time and patience to develop, but once it does, there is nothing like it in the world!

The funny thing about trading is when we are down we are fearful that we will have to take a losing position, but when we are up we are also fearful that our gains will be taken from us.  These are natural responses to market behavior, that is exactly why it is possible to make money in the markets, just make sure you are not one of the crowd.  If we had a way to completely turn off all of our emotions while trading there is no doubt that we would all be sitting in our estates, congratulating each other on another great day in the markets.  "Cheers my good man!"

To Fully Understand this Key Concept read Trading in the Zone