Winning is a habit. Unfortunately, so is losing.
– Vince Lombardi
Meet Matt, he opened a position at $100 based on a media analyst report that predicted the stock would move to $125 by the end of the first quarter. Matt went in for the long play but that was several months ago and the stock is down at $75 and no real signs of it shifting. The renewed movements in the markets do not appear to be making significant differences and the stock is not heading back towards the break-even mark. Matt is holding out, but is that the right move? When faced with a losing trade does it make sense to hold out for a break-even point or is it better to cut your losses and move on?
What does the break-even point bring with it other than the lack of loss? Psychologically it is a very strong pull as it means that at the end of the day one can see oneself as being unfortunate but not having made a loss. It is something that many will hold out for so that they keep hope in the trade rather than having to admit defeat. It becomes a statement about their abilities and the longer it runs the harder it is to cut out. However there are several disadvantages that go with this
Step back for a moment and think about the nature of the markets and the fact that they are made up by many traders all looking for the same end result, a profit. There will be a large number of them that read the same report, that saw the same opportunity and who are looking for the same turn around. However, the nature of the markets require there to be another side and in this instance it will be those who went short and who want to protect their profits.
The stock isn’t going to go anywhere soon in all probability so isn’t it better to get out? After all whilst the trade may be showing a loss, the fact is that capital tied up in the trade is capital that can’t be used to make other trades that could turn a profit. In business this is seen as an opportunity cost and is seen as a negative, but for traders the emotional and psychological attachment to their original trade blinds them to such things.
Matt is quite normal and his response natural as he also blames himself for making the trade, listening to the analyst, reading the markets wrong, going with his instincts and for risking so much. Nothing wrong with questioning himself like that as it helps to protect against such errors in the future.
However, self doubt is destructive and making the whole focus about him and therefore the need for the trade to break-even as some element of self-redemption is just more destructive. The process becomes driven by emotions, trading hope and not rational, detached and logical thought.
To get back on track, Matt needs to step-back and review the facts as they were when he made the trade. Acknowledge that the decision may well have been a reasonable one based on the facts and that losses are a fact of life in the markets.
Maybe Matt can identify some extra steps he could have taken prior to committing himself that might have changed his strategy or expectation. Maybe he could have ignored his ‘hunch’ and relied more on objective analysis but the reality is that experienced traders go with instinct sometimes and it isn’t the worst thing in the world. Indeed analysts can be right just as much as they are wrong so following their advice is not a bad option as after all, the markets are not a pre-determined game and there is no such thing as a trading certainty.
So what is the best advice for Matt or anyone stuck in the losing trade dilemma?
Step back, look at the big picture and make it all less personal about being a good or bad trader and more about the nature of the markets. More importantly take emotions out of the equation and take whatever capital is left and look for the next opportunity. Every trader will face losses, the successful trader is the one who can learn from the experience and move forward.
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