Bouncing Ball Theory

The bouncing ball theory is not about a trading system, it is about the reality of cutting losses quickly and why it is important to do so.

Can a ball bounce back if it doesn’t hit the floor or any hard object on the way down?

Of course not, the ball will simply keep falling until it hits something.  And the lower it falls before it hits something, the harder it is for the ball to bounce back to the level it falls from.

In order for our portfolio to bounce higher after a minor correction, we have to ensure there is a floor at a level for the portfolio value to bounce to a new high when the prices of the stocks in your portfolio increase.  The only problem is that when you are holding stocks that are “trending” against you and you do not cut your losses quickly, these stocks will lower the floor of your portfolio.  As a result, the value of your portfolio will be much harder to bounce higher than your previous highest level when your other stocks begin to increase in price.

In other words, when you gain 3 steps, make sure you don’t give back more than 2 steps (or 3 steps being the maximum); otherwise, it will be difficult for your portfolio to bounce higher and higher every time stock prices continue to increase.


2 replies

  1. THANK YOU! I’ve found your Bouncing Ball,Trading Experience, and Cut Loss Early tweets most helpful.

    As a newbie, I am still trying to find some ways to help me actually take that difficult step and cut loss early. I am looking for ways to bolster my courage and self-discipline to counter my aversion to loss.

    Please consider writing or suggesting additional articles about CUT LOSS EARLY with specific steps, strategies, mental tricks or exercises to help readers CUT LOSS more decisively and even more automatically.

    • Hi Katy, you’re very welcome! First, thanks for reading. Second, I’ve already written some thoughts on how to manage your thought process so that you can build up your mental strength to cut loss. Please go to the home page (by clicking on the banner “Trading my two cents” on the very top center of the webpage) and then look to the left column with the title “Featured Categories.” Under the column, you will see “TRADING PHILOSOPHIES AND THOUGHTS”.

      You can start by reading all eight posts that started with “Where Ego Dares”. It would be best if you start with #1 and read in sequence to #8.

      Please let me know if you have further question.

      Again, thanks for reading!

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