Stock Cut Loss and Averaging Down

Instead of focusing on fundamental theories or principles, I'd like to write about practical techniques.

Today, I'll start by discussing what I personally consider the most crucial and challenging aspect in real-world trading.

What do you think is the most important thing in real-world trading?

In the stock market, the ideal way to make money is to maximize profits when you win and minimize losses when you lose.

Conversely, if you trade with a strategy of gaining 1% and then cutting losses at 3%, you'll end up losing all your profits from four days in just one day.

Most people who have a moderate understanding of stocks, at an intermediate level, experience this phenomenon.

This happens when you can somewhat read charts and understand supply and demand.

This applies to a large number of stock investors.

Those who feel like they're on the verge of success but aren't, those who see prices go up and down twice, or

those who get two out of three trades right but still don't make a profit, are experiencing this because their trading methods are flawed.

Most successful traders achieve profits by maximizing gains and minimizing losses.

Even the most expert or seasoned traders can't avoid losses entirely.

The only difference is that they are well-versed in and accustomed to methods for minimizing those losses.

Personally, I believe the most crucial aspect is trading method skills.

Everyone understands the importance of cutting losses (손절매), but no one has ever taught how or what kind of method to use for it.

While everyone has their own unique criteria, this is the trading method I've found to be the most efficient in real-world situations.

Therefore, today I'll discuss methods for cutting losses (손절매) and averaging down (물타기).

Generally, for very short-term trades and 1% short-term trades, a 3-4% cut-loss line is suggested, while for longer-term investments, it's 10%, but

these methods don't work in real-world scenarios.

Do you think the market movers (세력) are unaware of the information you know?

The reason why they shake the stock price up and down when they start to actively push it up is for this purpose.

Stock prices often rise after short-term traders cut their losses.

When the price fluctuates up and down and breaks below the low point, you must have the courage to endure and patience to hold on to reap the full benefits.

So, what is the right way to determine the magnitude of a cut-loss? The answer is that it should be a level you can personally handle.

In other words, it's the level of price decline that you can withstand and be patient with.

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Therefore, the cut-loss margin differs depending on individual investment proportions and amounts.

I'm not sure how other expert traders handle cut-losses, but here's my approach.

First, let's assume you're buying 10 million won worth of a stock. You would initially invest 50% through a market order or your first buy order.

After the initial purchase, let's say the price goes up.

When you're up 2%, you make an additional purchase.

(Depending on the intraday pullback or the buying strength in the order book, it might vary slightly. However, the key is to make additional purchases when you're already in profit.)

By making an additional purchase, your account's rate of return might decrease, but you'll always be in a position to secure profits even if you sell immediately.

After the additional purchase, the upside potential doubles.

This maximizes your profit potential.

If the price goes down after the additional purchase, the #cut-loss (#손절매) #line is when you're still in profit.

You can either sell everything or sell 75% and hold the remaining 25% to repeat the process of averaging down (물타기) and chasing losses (불타기).

Next, let's consider a scenario where the price goes down after the initial purchase.

After the initial 50% purchase, if the price drops by 1-2% (depending on the stock and your tolerance), you cut 25% of your position (#손절매).

Stocks that are poised to rise typically experience corrections within a 2% range.

Confirm a double bottom and wait for the price to break above the previous high of the double bottom and then for a pullback.

During an uptrend, corrections can be followed by a buy opportunity after confirming a double bottom. However, for stocks that are falling relative to the opening price, a double bottom may be followed by further declines.

When a pullback occurs, add 25% to your position by averaging down (물타기).

If the decline exceeds 3-5%, it's more likely a genuine downtrend rather than a temporary shakeout.

In such a case, avoid averaging down on the same day.

Wait a day or two until a trend reversal is confirmed.

After successfully averaging down and a rebound, if the price is in a profit zone, determine if it's a simple technical rebound or the start of a further uptrend.

Then decide whether to sell everything, sell 25%, or buy an additional 50%.

After a decline of 3-5% followed by a rebound, it's usually best to sell everything.

If you successfully averaged down after a smaller correction, you can add 50% following the same strategy as when the price was rising.

If, after the initial averaging down, the price falls further while you're still in a loss, your cut-loss line (#손절매) becomes your averaging down buy price.

The likelihood of a rebound on the same day or the following day for that stock is low.

If a clear sign of a rebound appears after that day, you can then average down (물타기) with a 50% allocation.

If you fail even at this stage, after three attempts, it means you need to study harder.

Even if you succeed just once out of three times, you won't lose. If you can't even manage that, you need to practice more with #paper trading (#모의투자).

Finally, if the decline is 10% or more, leave 25% as is and don't average down.

Use the remaining 75% to make profits in other stocks and then use that profit to reduce your position in the stock that's down 25%.

Even if 25% of your position is underwater, if you manage to generate a 3% profit in other stocks using the 75%,

use that profit to sell some of the stock that's losing money.

If you're down 12%, you can exit your entire position without any net loss if you make a 4% profit in other stocks.

If you successfully trade just one or two stocks, you'll likely be able to sell your losing stock immediately.

Don't cling to the idea that a stock will eventually bounce back just because it's fallen a lot. Even if you average down (물타기) and it does recover,

it's unlikely to reach your breakeven point.

In other words, trying to revive a dead horse is futile.

It's quicker to recover by focusing on making profits with other stocks than trying to recover losses in a particular stock through averaging down (물타기).

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I'm not sure if you've understood all the points I've made so far.

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If you're worried about the commission fees or a 2% cut-loss on 25% of your capital, then stick to long-term investing.

A 2% cut-loss on 25% of your position is easily recouped with a 0.5% gain after investing 100% if your averaging down (물타기) strategy is successful.

Those who are currently experiencing profits and losses (excluding those who consistently lose – they need to study more)

can make money without relying on complex trading techniques if they master this skill.

This approach minimizes losses and maximizes profits when successful. While it may not lead to huge gains, it ensures you don't lose money. It's a method for cutting losses (손절매).

You won't be afraid of price declines.

Of course, determining whether a stock is at its bottom is challenging, but if you're unsure, you can

buy after the initial upward move from the bottom and when a pullback with a higher low appears.

If you haven't established how much capital to allocate to each stock or how to handle cut-losses (손절매),

refrain from buying and focus on establishing these principles first.

The same applies to long-term investors and those investing large sums of money.

For long-term investments, simply using a disciplined cost averaging approach is sufficient, even if you don't know complex trading techniques.

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If you don't lose, opportunities will always arise.

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In real trading, hitting the daily limit up (상한가) isn't the most important thing. The key is how to avoid losing money.

Developing the habit of how to recover from losses is crucial.

The methods I discussed above are my personal approach to cut-losses (손절매) when focusing primarily on short-term trades.

I'm not suggesting everyone should blindly adopt them.

Based on your capital allocation and trading style, you need to develop and internalize your own approach.

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It seems simple, but it's not at all.

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It was more challenging for me personally than researching and developing trading techniques.

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You'll realize it's not easy when you try it yourself.