A recent newsletter:
“Cut your losses.”
Everyone’s heard it. Everyone says it.
But few really understand what it means or sticks to it when it matters.
Many think it means giving up.
Others see it as a weakness.
And for most people, the moment they should cut a loss, their emotions get in the way.
Here’s the truth:
Cutting your losses is not weakness. It’s the core principle of survival. It’s not about admitting defeat. It’s about staying in the game long enough for the wins.
But even though many know conceptually they should take a loss, most can’t.
And it’s not because they lack intelligence.
It’s because their brain is wired to fight it.
10 Reasons People Don’t Cut Their Losses (Even When They Should)
1. Loss Aversion
Losing hurts way more than winning feels good. So people freeze. They hold onto bad trades longer than they should to avoid that sting.
2. Sunk Cost Fallacy
“If I just hang in a little longer, I’ll get my money back.” Nope. People get stuck because they don’t want to “waste” what they’ve already put in. But that money? Already gone.
3. Fear of Regret
Nobody wants to sell and then watch something bounce back. So they stay put, doing nothing, hoping for the turnaround.
4. Ego Threat
Admitting you were wrong? Brutal. Especially when you think of yourself as someone who’s usually right. So instead, people hold on, praying the market will change to fit their story.
5. Social Comparison
It’s not only about money, it’s about what people think. Nobody wants to be “the one who lost.” So they keep holding and keep bleeding out.
6. Ambiguity Aversion
Selling means uncertainty. Starting over. Not knowing what’s next. Holding on even to something that’s clearly bad make people feels safer.
7. Overconfidence
“This trade just needs a little more time.” Famous last words. Overconfidence makes people think they can outsmart the market. They can’t.
8. Endowment Effect
Once you own something, you’re married. Many start believing whatever is more valuable than it really is. Traders do this like clockwork.
9. Cultural Pressure
We live in a world that glorifies grinding it out, never giving up. But here’s the thing: Quitting losers fast is what winners do.
10. Cognitive Dissonance
You believe you’re smarter than your neighbor, but your account says otherwise. That conflict? Painful. They lie to themselves instead of taking decisive action.
How Trend Followers Cut Losses (System, Not Emotion)
Here’s how the pros do it:
They set their exit rules before they enter a trade.
No gut feelings. No wishful thinking.
Example:
You buy at $100. Your system says:
If it drops to $95, you’re out.
If it rises, let it run.
You follow it, no matter what.
That’s it.
Trend followers might lose on half their trades, but the losses? Small.
And when something runs, they let it run to the moon (if it goes that far!).
Cut small losses fast. Let big winners compound.
That’s the edge. Always has been.
If you don’t have a rule for when to get out, you’re not trading. You’re hoping.
From the Community: A Real Story
Last week, a reader named Dylan emailed me:
“Michael, I was down 40% on a tech trade and just couldn’t sell. I kept telling myself it’d bounce back. Then I re-read your chapter on loss aversion… and finally sold. Two weeks later, it dropped another 20%.”
That’s what this is all about.
Cutting losses isn’t about being right with your ego. It’s about protecting your capital.
Capital is oxygen. Run out, and the game’s over.
The market doesn’t care how smart you are. Or how long you’ve held something.
It only cares about price.
When price moves against you: cut it.
Move on.
Live to catch the next trend.
The Real Edge? Let Go.
You can’t win if you refuse to lose.
Cutting your losses isn’t emotional. It’s not personal.
It’s math.
The best traders cut losses without flinching. Not because they’re robots, but because they’ve trained for it. Their systems handle it, so they don’t have to.
Here’s the part most people don’t want to hear:
The longer you wait to take a small loss, the more likely it becomes a ****ing huge one.
So ask yourself right now:
Where are you holding on, hoping?
And what would change if you let go?
This is trend following.
Dear Michael,
I have read and listened to a lot of your stuff. This is the best you have ever written.
Best,
Robin M.
Thanks.
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