Do you have what it takes to make money in the stock market? Consider the following excerpt from Tharps, 'Trade Your Way To Financial Freedom':
'Perhaps the number one rule for trading is to cut your losses short and let your profits run. Those who can follow this simple rule tend to make large fortunes in the market. However, most people have a bias that keeps them from following either part of this rule.
You must pick one of two choices in the following example:
Which would you prefer: (1) a sure loss of $9,000 or (2) a 5% of no loss at all plus a 95% chance of a $10,000 loss?
Which did you pick, the sure loss or the risky gamble? Approximately 80% of the population picks the risky gamble in this case. However, the risky gamble works out to a bigger loss. Taking the gamble violates the first part of the key trading rule - cut your losses short. Yet most people continue to take the gamble, thinking that the loss will stop and that the market will turn around from here. It usually doesn't. As a result, the loss gets a little bigger and then it's even harder to take. And that starts the process all over again. Eventually, the loss gets big enough that one becomes forced to take it. Many small investors go broke because the cannot take losses.
Now consider another example:
Which would you prefer: (1) a sure gain of $9,000 or (2) a 95% chance of a $10,000 gain plus a 5% chance of no gain at all?
Did you pick the sure gain or the risky gamble? Approximately, 80% of the population picks the sure gain. However, the risky gamble works out to a bigger gain. Taking the sure gain violates the second part of the key rule of trading - let your profits run.
People, once they have a profit in hand, are so afraid of letting it get away that they tend to take the sure profit at any sign of a turnaround. Even if their system gives not exit signal, it is so tempting to avoid letting a profit get away that many investors and traders continue to lament over the large profits they miss as they take sure small profits.'