Financial markets are basically driven by human emotions--fear, greed and indecision.

But just as being aware of how important human emotion is in assessing the outlook for the global marketplace, each investor should be aware of how those emotions affect his/her ability to act in relation to their investments.

"You've got to know when to hold 'em, know when to fold 'em. Know when to walk away and know when to run. You never count your money when you're sittin' at the table. There'll be time enough for countin' when the dealin's done."

"Every gambler knows that the secret to survivin' is knowin' what to throw away and knowin' what to keep."

These words from the Kenny Rogers hit song The Gambler are as pertinent to the financial markets as they are to gambling.

Knowing when to fold ‘em is a critical part of investing and trading. Indeed, there would be very few who would argue the fact that cutting losses is vital to investment success.

Cut your losses and let your profits run--who hasn't heard that? It is the key to successful trading and it is also just as important in investing.

The longer-term investor might have a little bit more flexibility, but in reality, no matter what our time horizon, we all need to have a plan--when to cut a losing position and when to close a winning one.

Cut your losses short--a simple concept, but one that eludes many investors. Why is such a simple act so difficult to do? If we take a wrong turn in the road, we will change direction as soon as we realise that we are going the wrong way--an easy decision.

But when it comes to admitting that we have made a mistake in our investment selection, we often freeze.

Discipline goes out the door and human emotion comes in. This inability to take a loss at the time it should be taken is possibly the single greatest downfall of all traders. Losses have a nasty habit of getting worse and what starts as a small loss can turn into a major, soul-destroying episode.

Watching a loss grow bigger by the day can freeze our minds and consume all our energies. Instead of looking for new opportunities, we focus on the loss.