Does it sound familiar
I am very poor at taking loss when a SL is hit,and exit quickly as soon as profit is seen on my trade.You tell yourself you’ll get out as soon as SL is triggred, but just before getting stopped out you decide to hold onto the trade and let the loss grow.
When it comes to profitable trading, If you want to be successful You must get comfortable in taking loss. With leverage, one loss which is allowed to keep running can clean out a whole account.
Trader should be trading with a plan that has been profitable over a period of time. None of us likes to lose, but when it comes to trading if you want to be successful you should take loss with a smile and prepare yourself for next trade.
What Causes a Trader to hold onto losing trade
We fear loss because your brains do not assign the same weight to a loss as it does to gain. Suppose you lose Rs 1000 and You gain Rs 1000 brain will assign different weight age to both instances. Losing money pains more than getting the same amount of money. Another instance suppose your employer gives you a 10K hike and in another instance he gives you a 10K demotion from your salary which one will pain you more.
Our brain typically assigns 2.5 times the weight to a loss, as it does to a gain (Kahneman and Tversky, 1979).
We don’t like to lose, and statistics show the majority of humans will gamble in order to avoid a loss. The real problem is that if you get back to “even” after gambling in this way, your behavior is rewarded. You did the wrong the thing (you went against your trading plan and your stop loss rules) and it worked out. But most of the time it won’t. It’s a trap, and it lures in new traders and casino gamblers alike. I agree out of 10 SL Hit, 5 trades after hitting SL comes back to entry cost and trader think if he just hold on to it he could have avoided the loss, but 1 bad trade in which prices just keep going against you which typically happens in a trending market, that 1 trade which wipes your trading account.
How to Fix the Problem of avoiding loss
Just Like quitting a thing you are addicted (Like smoking) to is difficult, but not impossible. On the similar ground there is no easy fix for avoiding loss. Losing sucks; as humans we don’t like it and it results in a most of the trading problems. But there is always a solution which is difficult to follow but those who do enter into the top 1% profitable trader.
A trader need to accept those feeling which comes when you see your trade hitting your SL and don’t let those feelings affect your actions. It is within your control. Think about other areas of your life where you feel strong emotion, but don’t act on it. Instead you remain present, compose yourself and act according to your plan or principles. You like to eat Junk foods but you avoid it as its not good for your health.
Therefore, the first step in managing loss aversion is to have a plan in the first place. If you get into a trade and don’t know how you will handle it if it moves in your favor, against you, or does nothing, then you shouldn’t be in the trade at all. Your plan of attack let’s you know what you will do in each scenario. It also let’s you know which trades to take and which to avoid.
Your Trading plan must provide details on how you will enter and exit positions, what kind of quantity you will trade with. After describing all the details you must follow that plan no matter what sort of emotions you face while in those trades. Know there will be a strong compulsion to let a loss mount because you don’t want to realize/book the actual loss, due to ego or some other reason. You will feel these things. Admit it, and try to continually bring yourself back to your trading plan, letting the plan play out.
Do this in a demo account until you are like a robot at following your plan. Only then should you switch to real money–start out trading with the smallest position size possible so it is easier to maintain your robotic focus.
It easier said than done though. You will face lot of resistance in your mind, strong feeling of not following plan. But eventually the person who do not give in and follow these exercise day to day basis for weeks,month and year are the real winners.
Not succumbing to emotional moments, and seeing a plan through is what creates great traders.
Cutting losses is a critical aspect of successful trading. However, many traders struggle with this seemingly straightforward task. Emotionally, psychologically, and financially, letting go of losing trades can be challenging. In this article, we will explore some common reasons why traders struggle to cut losses and provide insights on how to overcome this barrier.
- Fear of Regret and Admitting Mistakes
One of the primary reasons traders struggle to cut losses is the fear of regret and admitting they made a mistake. Taking a loss can be psychologically difficult, as it triggers feelings of failure and self-doubt. Traders may hold onto losing positions in the hope that the trade will eventually turn around, unwilling to accept that they were wrong. Overcoming this fear requires recognizing that losses are an inherent part of trading and that admitting mistakes is a necessary step toward long-term success.
- Attachment to Sunk Costs
Traders often become emotionally attached to their losing trades due to the concept of sunk costs. Sunk costs refer to the money and time already invested in a trade. This emotional attachment leads traders to hold onto losing positions, hoping to recover their initial investment rather than objectively evaluating the trade’s potential for future success. To overcome this attachment, traders should focus on the current and future prospects of the trade, rather than dwelling on past losses.
- Overconfidence and Optimism Bias
Overconfidence and optimism bias can cloud judgment and lead to the reluctance to cut losses. Traders may believe they have a superior ability to predict market movements or underestimate the risks involved. This bias can result in holding onto losing trades longer than necessary, hoping for a reversal in fortunes. It is essential to maintain a realistic view of market probabilities and remain objective in assessing the potential outcomes of a trade.
- Lack of Risk Management and Stop-Loss Orders
Failure to implement proper risk management strategies is a common pitfall for traders. Without predefined exit points, traders may find it challenging to cut losses when the trade moves against them. Setting stop-loss orders, which automatically trigger an exit when a predetermined price level is reached, can help mitigate this challenge. Traders should establish stop-loss levels based on their risk tolerance and adhere to them consistently.
- Emotional Attachment and Loss Aversion Bias
Emotional attachment and loss aversion bias play a significant role in traders’ struggle to cut losses. Loss aversion bias refers to the tendency to prefer avoiding losses over acquiring gains. Traders are more emotionally impacted by losses than gains of equal magnitude. This bias can result in holding onto losing positions, hoping to recover the losses rather than accepting the loss and moving on. To overcome loss aversion bias, traders should focus on the overall risk-reward ratio and the long-term performance of their trading strategy.
- Lack of Discipline and Impulsive Decision-Making
Lack of discipline and impulsive decision-making can undermine a trader’s ability to cut losses. Emotional reactions to market fluctuations or external factors can lead to impulsive actions and a departure from the trading plan. Traders must maintain discipline, stick to their predefined exit strategies, and avoid making decisions based on short-term market movements or emotions. Developing a disciplined mindset and following a trading plan consistently are essential for overcoming this challenge.
- Cognitive Biases and Confirmation Bias
Cognitive biases, such as confirmation bias, can contribute to the struggle of cutting losses. Confirmation bias occurs when traders seek information that confirms their existing beliefs while ignoring contradictory evidence. Traders may selectively focus on information that supports their decision to hold onto a losing trade, ignoring signs that suggest it may be time to exit. Overcoming confirmation bias requires a commitment to objective analysis and an open-minded approach to evaluating trade outcomes.
Conclusion
Cutting losses is a crucial skill for successful trading, yet many traders struggle to overcome the emotional and psychological barriers that hinder their ability to let go of losing trades. By understanding and addressing the reasons behind this struggle, such as fear of regret, attachment to sunk costs, overconfidence, lack of risk management, emotional biases, lack of discipline, and cognitive biases, traders can develop the discipline and mindset needed to cut losses effectively. Remember, cutting losses is not admitting defeat but a strategic move to protect capital and position oneself for future profitable trades.