The Best Time to Take a Loss

In The New Market Wizards, a great book by Jack D. Schwager, about some of the best modern day traders, one of the floor traders interviewed said, "The time to take a loss is when you have one". He absolutely would not let the market close while he was in a loosing position. Instead he would liquidate the position. While that is a very aggressive trading style, it highlights a very important decision every trader must make: when to take a loss. While I haven't quite developed that much discipline, I am finding it easier to take losses without regret. And I've found the sooner I take the loss, the less regret I have. Nobody likes to take a loss in the market, but if you've traded according to your plan, or your rules, you can have the satisfaction of knowing you traded well even if you took a loss.

And, speaking of losses, I took some today on three positions I opened recently.

I sold Massey Energy (MEE) for a 1.95% loss.
I sold iShares Nasdaq Biotechnology (IBB) for a 2.6% loss
I sold iShares MSCI Japan Index (EWJ) for a 4.07% loss

William J. O’Neil used to have an 8% trading loss rule, where he would liquidate a position that went down that much or less. The exact amount a trader uses is a personal preference, but the important thing is to have a rule and of course follow it.