If you have heard of Timothy Sykes then you are well aware of his #1 Rule -Cutting Losses Quickly. But what did Tim Grittani mean when he introduced Cutting Losses Intelligently? This is the topic I want to cover – when is the right time to be Cutting Losses Quickly vs Intelligently.
Timothy Sykes, who preaches daily about the importance of his #1 Rule – Cutting Losses Quickly – developed this idea as a way of protecting traders, especially new ones, from blowing up their accounts. His experience over 20+ years has honed into this being one of the most important rules when it comes to protecting trading accounts.
(Trading is extremely risky as at least 90% of traders lose. Do not trade with more money than you’re willing to part with and don’t think that just because you cut losses quickly you won’t lose money.)
So where does Cutting Losses Intelligently come from?
Cutting Losses Intelligently
Tim Grittani is Tim Sykes multi-millionaire trading challenge student that now has around 10 years of trading experience. Back in his time he developed the idea of cutting losses intelligently vs quickly. This adaptation of Tim Sykes’ rule is one of many things that Grittani has introduced to the trading community.
But how exactly can a trader cut losses intelligently instead of quickly?
Is there such a thing of an intelligent loss?
How can I cut losses intelligently appose to quickly?
What does this mean?!
These are some of the questions even I thought of when I first heard this term a couple years ago.
Cutting Losses Quickly vs Intelligently
Timothy Sykes stresses the important of cutting losses quickly because it’s a great habit to get into especially for new traders. New traders have troubles developing the right mindset so he has to do everything he can to train traders appropriately for battle. He is ALL about protecting, protecting, protecting!
But what does cutting losses quickly mean? So cutting losses quickly isn’t something set in stone. This can vary upon individual and circumstances. I know, this doesn’t help. Let me give a personal example to help paint a picture for you.
Watch THIS video if you have access. This will show you what I am about to explain.
Cutting losses quickly for me works in two aspects.
1 – The Morning Panic Dip Buy: When a stock is panicking and shows a quick sign of a possible bounce, some traders will jump on that opportunity to buy. (Not sure what a Morning Panic Dip Buy is? Learn from these 7,000+ video lessons). The risk is the stock has a small hiccup and continues downwards. When this happens I like to cut my loss as close to my entry as possible. As quick as possible! By cutting it quickly as possible I can try to minimize my loss so I can enter at a better price and potentially make back that tiny loss.
2 – Cutting Losses When My Risk is Hit: This is when I am buying a breakout and I have a set risk in mind. My risk varies anywhere from 1-4% max. The second my risk pops up on the level 2 on the buy side (Bid) then I am trying to cut as closely and as quickly to my risk as possible to minimize my loss. My Risk Is My Risk For A Reason. This could be a hybrid of both Intelligently and Quickly.
Okay, so cutting losses quickly means trying to get out of a stock when it is no longer going in my favor. OR the stock is showing a type of price action I do not feel comfortable with and exiting. Cutting losses quickly can even be intelligently if you recognize a pattern is not acting the way you want and you exit for a small gain. This is a possibility as well.
Tim Grittani’s Explanation of Cutting Losses Intelligently from what I remember in a video lesson. Note: these are not his exact words but my explanation of what I remember and understand.
When he spoke about cutting losses intelligently he spoke in terms of him shorting stocks when I listened. (Click this link to learn about short selling.) Note: I am not sure if this is how he meant cutting losses intelligently or if this is how he even does it. This is 100% my own understanding of and how I apply cutting losses intelligently. Anyways, when I listened to the video about his explanations he talked about shorting. So when a stock blew past his stop, or when he got stubborn and held past his risk level, he would wait for a pull back to cover his shares instead of selling directly at the top of the spike.
So taking this knowledge and applying it to going long would be like buying a stock. The stock panicking way below my stop level. Then waiting for a bounce to sell my shares. This should decrease my loss by not chasing the panic down and avoid selling at the bottom.
How Cutting Losses Quickly Turned into Cutting Losses Intelligently
This was my Friday’s trade on $BTCS. What started off as my bread and butter – rinse and repeat – go-to strategy soon turned into a well managed accident!
When you take a look at the image above, you can see a series of red candle sticks that go down. For a split minute you notice a hint of green. During this green candle I dip bought thinking that this was the turn and the stock was beginning its bounce. This was not the case. Watch this video for a visual walk through.
While I was trading, my two laptops were lagging. Unsure of whether or not my original buy order was executed, I must have entered in another price to try purchasing shares. Next, one laptop was showing level 2 in the 2.30s and beginning to profit but when I took a look at my other laptop it was showing me a loss of $200+.
Apparently I had gotten my original entry around $2.275 for 361 shares. Then i added at $2.31 with 354 not realizing I had been filled prior. Now I have two orders executed. My computer screens were slow and didn’t inform me of any executions until I was already down. Next I see that I have over 1,000 shares which truly confused me. Trying to cut my losses quickly (as soon as I saw I was down) my order was rejected because the amount of shares I was shown by my broker was incorrect.
As the stock panicked below $2.15, I had to make a quick decision. This was no longer a “Cut Losses Quickly” scenario. Immediately I had to realize my three options once my broker finally revealed my real share count.
- Cut losses once they reveal my share size and take whatever loss is currently available.
- Recognize that this is my bread and butter pattern. Accept that I entered too early. And had I been able to cut my loss immediately I would watch to see if the stock would hold $2.00 as support and then bounce. This would leave me the option to sell into the potential bounce where I would’ve taken profits. This would have been great had I been able to re-enter with fresh shares – thus confirming cutting my losses intelligently into the bounce to reduce my potential loss was my best option.
- Have a potential $300+ loss if $2.00 doesn’t hold and bounce and cut into the panic as the stock crashes lower.
I chose #2. Finally my broker corrected its error and revealed my true size. 715 shares ended up being my total. Thankfully this was shown to me when the stock hit the $2.00 mark and decided to bounce. Instead of cutting my losses quickly I chose to let my pattern play out. I was mentally preparing for a $300 loss. Fortunately $2.00 held and it ultimately bounced to the $2.50s. I saw I was down about $20 so I tried cutting my loss for something small but when it didn’t hold up I ultimately cut my loss at $2.185 causing me to lose about $90 overall which equaled out to 5.62% loss which isn’t the end of the world.
Thanks to Experience and Studying
By having my experience with this pattern mixed with the teachings of both Timothy Sykes and Tim Grittani, I was able to manage my loss the best way I possibly could.
Why Not Hold and Hope
The Importance of Mindset and Proper Habits
Some may be wondering why I didn’t just hold for a profit if I knew the stock was going to bounce. Honestly, a bounce is never guaranteed. Many other stocks that panicked that day were not bouncing as much. Protecting my mindset and having reality in mind was my focus. My goal wasn’t to get out breakeven or for a profit when this accident occurred. My goal was to minimize my loss as intelligently as possible. I did not want to hold and hope which could lead to creating poor habits in the future.
Now, if I were able to exit appropriately without adding the extra shares creating this huge hiccup, then I would have cut my losses as soon as the stock went against me after my original entry. Then I would have re-entered when the stock showed signs of $2.00 being support and then sell for a profit into the bounce. My plan after that was to hold and watch the volume fade out and the stock spike until it reached my 10% goal.
Because of the mishap my mindset was skewed and I had to protect, protect, protect as intelligently as I could.
When is Cutting Losses Quickly vs Intelligently Appropriate?
Cutting losses quickly vs intelligently is something that takes a lot of practice and studying. Knowing when is the best time to cut a position quickly vs intelligently is a decision that has to be made based on the individual trade and the circumstances that are happening at that time. Cutting losses quickly can be the safest route and what I recommend. Had I cut my loss quickly instead of accidentally doubling my position size, my $90 loss could-have-should-have been about $20 instead.
Fortunately, thanks to the lessons I have learned from Tim Grittani, my loss was well managed and I am very pleased with how this loss was handled.
Hopefully this helps shine some light on the big question and gives a decent example based on my personal experience which can help you be safe during your trading journey!