As 2011 come to an end let me share an important aspect of trading
Keeping losses small in order to avoid huge losses
Why is that so?
From a psychological point of view nobody wants to sell at a loss as in most situations in life making mistakes and admitting them is associated with being a loser. That’s why most people prefer sticking to a losing position. They don’t want to be labeled a loser. So they start hoping their position will turn around and end up being a huge winner. The stock then keeps tanking. Then they hope they will be able to sell for a break even. The stock then goes down even more. That’s when being objective and balanced isn’t possible anymore. Losses have become huge and they are trapped.
The cost is simply huge. You lost money. You lost time. There’s an opportunity cost as well as during that time other stocks would have made you a profit. You lost huge amounts of energy as you couldn’t get this stock out of your mind.
When a position is getting ready to stop you out at a loss, do you find yourself bargaining with the name? Do you find your frustration level rising? Do you justify the reason for the move against you, and give it a little more room, only to get stopped out at a bigger loss? Or even worse, perhaps you now find yourself sitting on a double-digit loss, and are frozen with what to do with this now sinking ship?
And perhaps the biggest fear for a trader is closing out a position only to see it run back in their favor moments later. Trust me when I say that every trader, seasoned or not, has these moments when stop levels are hit and they hesitate with pulling the trigger.
How to avoid this Follow the below 3 Points
Keep Your Cool
“Deciding when to cut your losses is one of the toughest decisions for anyone to make, but traders at the top of their game know that they always have to make the decisions they need to make, which may or may not be the ones they want to make”
Get Comfortable With Being Uncomfortable
“In the trading world, you will either make money or lose money on any given trade. All that matters in the end is making more money when you’re right than you lose when you’re wrong. Knowing this, traders have learned to accept failure as part of the game, but they also use the information they acquire from their mistakes as a learning tool. Frequently, what they learn from losing money is more valuable than what they learn when they make money”
Make Yourself Accountable
“Commitment, perseverance, and discipline are the characteristics that move people beyond desire to action, that differentiate mediocrity from greatness, and that separate greatness from superstardom”
Avoid huge losses at all cost. Avoid thinking in terms of huge gains as well. Stay balanced. Stay focused and calm.