The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance.—-Ed Seykota
Although this sounds tongue-in-cheek (and probably is to some extent), it’s also true. Almost nothing is more ruinous than being risk-seeking with respect to losses, yet that is the way most individual investors behave. According to research, individual investors tend to take profits quickly and let their losses run—no doubt hoping for a recovery. While this may be enjoyable for one’s ego, it is a poor way to handle a portfolio. With enough transactions, the unwitting investor finds himself holding a diversified portfolio of losing positions!
