Accepting Loss in trading

By | April 17, 2013

One of the fundamental principals of trading stocks, or anything for that matter, is; you never play with money you cannot afford to lose. You should not be trading money needed for car payments, rent, food, diapers etc. The reason for this is, no matter how sound a system or piece of advice may sound, trades often go against you. Trading money you can afford to lose means that you have money to live, some money saved for a rainy day, and some for trading.

Now, by trading money you can afford to, or are willing to lose means just that. Even a successful trader’s account may experience dips or losses at many points. In fact, being willing to lose, or admit loss is essential to trading.

What does this mean? Willing to lose in order to win? Think of it this way.SBIN has been going up every day so you think let me also enter the stock and make money like my friends are making.

You’ve bought 50 SBI  stock that’s worth 100,000 You’ve decided that this should and will go straight up, all the way to the moon. You’re so sure of this. In a few days the stock worth falls to 95000 . It hasn’t moved the way you expected, but you don’t sell it because you want to at least get your money back. You don’t want to live with 5000 loss, because you don’t take losses. You’re a winner damn it! You check the trade a few days later and it has now slipped to 87000. If you get out now you will have lost 13000. Your friend says, “Hey, better ride it out.” So you ride that 87000 trade down to 60000. It should bounce back any minute now, right? 3 days later, we’re at 65000. The downward journey continues 63 K , 60 K , 55 K  and 40K . You’ve had enough! You’re out at 38000.

I don’t think this scenario is reaching too far, or reflecting on events that could never happen. The point of this story is to point out how avoiding losses actually leads to more loss. Now let’s look at this scenario another way.

You’ve bought  50 SBI stock worth  100000. You’ve decided that you’re only willing to lose 1000  on this trade BEFORE you made the purchase. Meaning, you still expect the stock to go to the moon, but if it doesn’t, you want to get out so that you have 99000 as your trading capital (and not 38000) to make the next trade. You buy the stock for  and It starts to fall. It hit’s your stop loss , and you’re out. You’ve lost! You’ve accepted it. You’ve moved on, with 99000 in your pocket.

Risk cannot be controlled without admitting and accepting losses. This is the only way to stay in the game to make other trades, giving you the opportunity to get some winners in the future. This of course is a simplified scenario, but the principal can be applied to many situations.

Do you have an exit strategy? How do you know when it’s time to get out of a trade? Share your thoughts with us.

5 thoughts on “Accepting Loss in trading

  1. Bramesh Post author

    Dear Johnson,

    Stop loss comes as the part of trading system you follow, Like we follow SAR System which has pre defined Entery,Exit and SL levels. These system are designed in such a manner which give good risk to reward ratio when we take trades.

    Rgds,
    Bramesh

  2. Johnson

    Dear Bramesh,

    Thanks for your very prompt reply. I agree with you Absolutely about the importance of having a Stop Loss at all times… but my query was more about wanting to know whether keeping a S/L based on our individual capacities of taking a loss on a given trade is better…(1000/- in the above example) or whether (on technical lines) keeping the S/L a little below the Support price?…so that we may not be Stopped Out too early due to the market conditions changing… rather than the normal fluctuations of the stock.?

    I think your valuable article on “How to use Stop Loss order in Trading” preferred the latter approach. Appreciate your comments anyway.

    Thanking you once again for kindly and magnanimously spreading awareness and knowledge on investing and trading.
    Heavenly Blessings!

    Best Regards

    Johnson

  3. Bramesh Post author

    Dear Johnson,

    Thinking that we should not have put SL is a blunder trader can commit, Always respect the market. I do agree 2-3 times it might happen stocks touches ur sl and reverses back, but if you get in this wrong habit one single wrong trade can wipe your whole trading account, so instead of blowing away my trading account i am more comfortable in taking small sl as it give me chance to survive the market longer.

    Rgds,
    Bramesh

  4. Johnson

    Indeed Bramesh…it is said that ” When you learn what NOT to do
    in order NOT to lose, only then can you begin to learn what to do
    in order to win” and have also learnt that we have to be patient with Winning Trades and enormously Impatient with Losing Trades.

    However… I have a small query related to the example you have given above… and would be very grateful if you could throw some light on the WAY OUT of the situation that I will mention here:
    I read with interest the example you have given of buying 50 SBI @ 2000 for a total value of 100000… and selling it off for 99000 ( as it hits the Stop Loss @ 1980) taking a loss of 1000. Fine… as you said.. we accept the loss and move on.. with 99000 still with us. But I am sure many of us would have also experienced a situation where … say after we get out (or rather Stopped Out) at 1980… the stock may move down till 1970… and then all of a sudden begin to move up and go well past our purchase price… in fact well above our price.. and then we wonder why did we ever sell it at 1980. Its an all familiar situation. So what does one do in such a situation.? Would getting back into that trade be an option?.. not as a revenge trade but because one genuinely felt that there is much upside to the stock and that our original reading of the chart still stands true… since the stock has started to move our way… albeit after we have taken a loss.

    What went wrong here?

    Was our Stop loss… too tight?

    Should our Stop Loss (S/L)have been kept at a tick below the support price?

    Or was it Wrong to have placed the S/L Based on our Personal Capacity about the maximum loss we will take?

    Would appreciate your esteemed comments.
    Thanks & Best Regards

  5. B P RAJU

    I am following the stop loss of 5% by considering 1:3 for the gain of 15%.

Leave a Reply