Why Traders Stick to Losing Position?

By | June 15, 2012

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.

Notice I’ve made ample use of the word ‘huge’. Avoid huge losses at all cost. Avoid thinking in terms of huge gains as well. Stay balanced. Stay focused and calm.

 

 

Another Most Probable reason is EGO

Let the market make the decisions, not your ego.

The rules are not hard to understand. Recognizing a profit from a loss is simple. If the rules are easy to grasp and a profit is distinguishable from a loss, where does the problem lie? What makes it so hard to apply the rules? There is something within each of us that has a power over our minds that prevents our acting according to what we have agreed is the proper course of action. That something is present in all of us and is very powerful, more powerful than anything I know. Let’s call it ego. Until we learn to get rid of our ego, we will never make money in the market consistently. Those who haven’t identified the ego’s ways will eventually be destroyed in the market because of their ego’s tendencies. It is just that powerful. The market rewards those who have subdued their egos. Those who rid themselves of their egos are rewarded greatly. They are the superstars of their fields. In the market, rewards come in the form of profits. In the world of art, masterpieces are the results. In sports, the players are all-stars and command enormous salaries. Every pursuit has its own manifestation of victory over the ego.

 What is the ultimate rationalization of a trader in a losing position? “I’ll get out when I’m even.” Why is getting out even so important? Because it protects the ego.

I became a winning trader when I was able to say, “To hell with my ego, making money is more important.”

“Everyone wants to feel like a winner. It’s tempting to pat ourselves on the back for making a winning trade, but it’s essential to face the facts: Many times a winning trade is a combination of an astute insight AND being at the right place at the right time. In other words, external circumstances such as plain good luck make you a winner.

When you put too much of your ego on the line with your money, you may feel great when you win, but on the other hand, you may feel discouraged when you lose. When you allow your ego to enter your trading, you put subtle pressure on yourself to succeed. This added pressure could compel you to make dumb mistakes like holding on to losing trades to avoid hurting your ego. It’s better in the end to take a professional approach to trading marked by objectivity and rationality. Sure, it is necessary to have a passion for what you do, but it is not necessary to get a swelled head.”

Indeed, one of the most important things you can learn is to keep your ego under firm control so that you’re never in the position of having to protect it when you’re wrong. Doing so is usually a costly mistake, even though we all let our own egos (and yes, that includes me) get to the best of us sometimes.

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11 thoughts on “Why Traders Stick to Losing Position?

  1. rohit

    dear sir,
    i found ur website when i was searching for pivot levels.i am very much thankful to u for ur valuable comments over rsi ,pivot points trading & the article over sticking to losing positions.i am a day trader & that articles were very helpful for me .thanks again

  2. Bramesh Post author

    Dear Manish,

    The example which you have give above shows that you fall under Investor category not under trader category. As an Investor you always use the Dips to buy Fundamentally sound stocks on Dips,but a Future trader look for opportunity to milk his profits as Future traders are always leveraged .

    Golden Rule for trader is never average Loss

    Professional Traders never trade in 2-3 lots they trade in multiple of 100 lots and without putting SL will be against there Risk management and money management concepts. So SL is must if you trade as if stock is going down after you take entry which means either your system is not optimized or you made a wrong entry and SL helps us in making a deeper hole into pocket.

    Having said that I do agree everyone has its own set of rule and risk management.

    Rgds,
    Bramesh

  3. Manish

    Hi

    While I read almost all your articles which are interesting and full of learning, I do not agree with you on this. I am in this recently and you will not make money if you apply stop losses. I may sound little odd here, however my exp is bit different. You need to apply different strategies to different trades.

    I usually trade in stock options keeping in mind the the potential risk and rewards. Just for example on Thursday I bought Tata Motors in falling market at 236 and 232. I lost one opportunity of buying at 228 for some reason. And remained in the trade till friday evening which gave me return of about 12000/- instead of applying stop loss and sitting on side lines. When you are buying a stock, and buying with conviction, you need to remain focused. However keep in mind the fundamental which are driving the market in short run and series of events which are playing out. I am long in Axis Bank on similar strategy from 1100 to 921 and accumulated the stock on every dip, targeting this for 1300/- till Diwali.

    May be you may enlighten me little more on both the trades.

    Kind regards

  4. Muthu

    Hi Brahmesh,

    I have been going through your website for few days. I am working in Canada. Is it possible for you to teach your courses.(hope team viewer & head phone is enough)

    If you can kindly mail me your course details little in depth.

    I would like to learn TA, Options, Gann. Kindly confirm.

    Thanks in Advance
    Muthu

  5. Bramesh Post author

    Dear Sir,

    I have sent you my course details. Please go through the details and let me know if you have any clarification.

    Rgds,
    Bramesh

  6. Samir

    Hi Brahmesh, I read your articles and they are quite educative. I wanted to know of more complex trading. I operate from 3 accounts in USA. And their we have different eligibility criteria for Options trading. I always turn my losing trade by selling the covered calls. And keep on covering and selling in money calls if price keeps falling. Can you please advice of any other strategy, which can be useful. Thanks Samir Sangani.

  7. Bramesh Post author

    Thanks for sharing your insight. Appreciate your inputs.

    Rgds,
    Bramesh

  8. Bramesh Post author

    Thanks a lot Pratik.. You will become a successful trader.

    Rgds,
    Bramesh

  9. RLN

    Good Evening. What you have written is absolutely correct. When a person who has the capacity to hold starts holding the stocks, inspite of huge losses, with a hope that there would bounce back. But at the end his hopes are blighted and he incurs huge loss. So not only Ego but also unreasonable hopes also play havoc in one’s hard earned money. Thanks

  10. pratik

    gm sir,
    i think sir u wrote everything in this article on me. bz when i was new so stock market no one is there to teach me like this and made lose in past. now i am learning every day something new and also ur blog is too much helpful to avoid that kind of lose. thanks alot.

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