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All traders lose trades.

You are no exception.

The good news is, if you have sound risk management, then you can actually be wrong more than you are right and still make money.

To make this a reality, you absolutely must have the discipline to cut your losses quickly.

As a general rule, follow a 3-to-1 ratio.

This means if you plan to make $3, then you should cut your losses as soon as you lose $1.

You could also express this as a percentage. For example, if you plan to make 25%, then you should cut your losses at 8%.

And if you only plan to make 10%, as might be the case in a bear market, then you would cut your losses at 3%.

You don’t have to be some stock picking savant to do well in the stock market.

In fact, profiting in the stock market basically boils down to one thing: lose the least amount possible when you are wrong.

When the stock drops below the price you paid for it, you are wrong!

When you cut losses fast, you don’t need to be right often, as long as you get at least a couple of big winners.

You can do quite well if you get just one out of every five picks right.

When you are holding a big loss, it clouds your judgement. You may try to rationalize it by telling yourself that it can’t go any lower, or that it will bounce back soon.

Instead, think of it this way; if instead of owning the stock, you had the cash and were analyzing it to buy now, would you still buy it?

If the answer is no, then you should sell it. If it is not a good trade when you are not invested, then it is not a good trade while you are invested.

Always cut your losses at a maximum of 8%.

Cutting them sooner is fine, but never, ever, let a loss get more than 8%. No exceptions!

This cannot be stressed enough.

You may think that a stock needs more room to breathe than an 8% fluctuation. However, if you choose your stocks based on the CAN SLIM model, and you time your buys correctly (off sound bases), then you should never see an 8% drop from your buy point.

Your average loss should never be more than 6%.

Periodically move your money from slower performing stocks to stronger ones.

This will maximize your profits while ensuring you cut losses early.

Even if your weaker picks are making money, this is a sound strategy.

At the end of each month, calculate the percentage change in the price of each position from the previous month. Now order each stock by percentage change from highest performing to least performing (the highest positive percentage is on top).

Often, when you sell a stock it will then turn around and go back up.

This is going to make you think that you are selling too early, and next time, you should give it more room to breathe.

Do not fall into this psychological trap!

Stop-losses are like insurance. When you buy insurance, if your house does not burn down, do you then stop buying insurance?

However, once a stock is making a healthy profit, you must give it more room to breathe.

The 8% stop-limit is from your buy price, not the peak price. This is an important distinction to make.

Take your losses quickly and your profits slowly.

The 8% stop-loss is a rule you must never break.

But it’s just one rule in your trading plan. You must develop your own set of rules that you will follow without exception.

You may try to talk yourself out of following your rules, such as using diversification.

Diversification is not a substitute for proper risk management.

The problem with it is, that in a bear market, all stocks go down. With hard selling rules, all your positions may stop out at an 8% loss. This is better than all of them going to 0!

You may also think that you’ve invested in sound stocks and eventually they will go back up. But good stocks bought at the wrong time can go down as much as bad stocks. Additionally, you may be thinking too high of your abilities to pick a sound stock.

Your 8% stop-loss along with your other rules will protect you from your ego.

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