Why Do We Hold Losing Trades Too Long? It’s something we’re guilty of. You do it, I do it, anyone who has ever been on the losing end of a trade has done it. But why do we hold on to losing trades for so long? It’s a combination of a number of factors. Some of them are psychological and some of them are learned. At the heart of the issue are fear and greed. These are two of the emotions that affect traders the most. Until you can eliminate these two things from your mind, there will always be the risk of failing as a trader.
Why Do We Hold on To Losing Trades?
So when is the right time to let go of a losing trade? That depends on your personal risk tolerance and trading objectives.
Some traders will simply cut ties with the trade while others will try to salvage it or wait to recover.
Neither solution is wrong, but if you wait too long there is always a chance of losing even more.
Just remember, as traders we will never be perfect.
Sometimes it is just better to cut bait with a losing trade and move on to the next one.
The Psychology of Trading
So much of trading stocks is psychological, especially if you trade frequently throughout the day. It is important to stay even keeled and never get too high or too low. We talk a lot about new traders getting emotional, or even chasing trades they’ve lost.
Once you become an emotional trader, it is likely only a matter of time until you blow up your account. This exhibits the power of human psychology. Here are some of the emotions that lead to us holding onto losing trades.
Why Do We Hold Losing Trades Too Long: Traders are Greedy
It’s why we all become traders right? Whether you are a day trader or a long-term investor, everyone is in the stock market to get rich.
Traditionally, greed is known as one of the seven deadly sins but in trading, it is the worst sin to have.
Greed will prevent you from selling a trade no matter how low or high you get.
If you’re up, you want to go even higher. But if you are down on the trade then you naturally want to hold it until you have locked in some gains. This is the downfall of emotional traders.
Traders are Egotistical
Especially traders that have seen some recent success. The stock market will humble you in a hurry if you let your ego get in the way of your trading. Our ego is one of the main reasons we don’t sell a losing trade: we don’t want to admit we were wrong.
When it comes to money, we never like to be proven wrong. To be fair, you have to have an ego if you think you can beat the stock market on a regular basis.
I never said you couldn’t have an ego, it’s just detrimental to your trades if you let it get in the way of admitting a loss. Once you learn how to admit you were wrong on a trade, you will find it is easier to let go of them.
Why Do We Hold Losing Trades Too Long: Traders are Inherently Afraid
What are they afraid of? The loss. I can speak from personal experience that wherever a trade goes against me, my natural instinct isn’t to sell.
It’s to hold onto it and hope I can recover my losses. Now I’ve matured over the years and learned to let losing trades go, but I still feel that fear anytime a trade suddenly turns on me.
But while you are hoping for the trade to bounce back your capital is locked into what will at most be a break-even situation. Technically speaking, the opportunity cost of holding that trade in a losing position is not worth it.
You could potentially be re-allocating that capital to another trade that you can make gains on. So if a trade does go against you, try to ignore the instinct to hold it until it’s a winner. Just cut your losses and move on!
We Think We Are Smarter Than We Are
Okay, now it just seems like I am insulting traders, but there is some truth to this. We absolutely think we are smarter than we are. This goes hand in hand with our ego never letting us admit we are wrong on a trade.
When I was younger, I never liked to think that I was wrong on a trade. My thought process was that I made the right trade, but the market is wrong. It’s just a matter of time until this trade turns in my favor, so I’ll just hold onto it until it does.
Does that sound familiar? I can guarantee most new traders think this way and a lot of experienced ones do too. I’m not saying we aren’t smart, but we need to learn to be smarter when it comes to not holding onto a losing trade.
How to Avoid Holding a Losing Trade
There’s a few ways to avoid ending up in this situation. I would say that most importantly, we should be mastering the emotions that are listed above. Once we have come to grips with our own trader psychology, we can proceed to discussing how to avoid holding a losing trade. A lot of it is mental, but there are some other things we can do to cut our losses.
Stick to Short-Term Trading or Long-Term Investing
This is something I had trouble with myself. Do you want to be a trader or an investor?
Sometimes I would start losing on a trade but tell myself, ‘well I like the stock so I’ll hold it for the long-term now and make back these losses’.
While it’s fine to want to hold stocks long-term, as a trader you know you always need that capital readily available.
Holding the trade for the long-term to recover losses can tie up a lot of your capital for a long time. If you want to be a trader, stick to trading. It sounds easy but it isn’t. We are inundated with information about which strategy is the best.
My suggestion? Choose which one matches your own risk profile and trading goals. Once you have, stick to it. You will find you have an easier time selling losing trades if you aren’t focused on holding them for the long-term.
Set a Stop Loss!
It is incredible how many traders do not set a stop loss on their trades. Not just traders but long-term investors too! Lock in your profits. There is no charge to setting a stop loss and you should never complain about cashing out a trade in the green.
The whole notion of holding a losing trade can be completely eliminated if you just set a stop loss before you buy. Is this our ego telling us that we couldn’t possibly be wrong about this trade? Is it laziness?
Whatever it is, if you are a trader that finds you tend to hold on to losing trades, start setting a stop loss and your brokerage will take that problem out of your hands for you.
Lock in Profits
This is related to setting a stop loss so you can take these two pieces of advice together. The number one rule for a day trader is to lock in profits. The market will not wait for you to gain more on your trade. You need to be responsible for your own profits and not let greed get in the way of things.
As traders we all know how quickly profits and gains can disappear on a trade. You never know when the markets will suddenly turn on you. If you are up 50% on a trade don’t wait for 100% to come.
While you might miss out on some larger gains, you will also see your account growing steadily. You can do this easily by setting that stop loss, but if you forget to, then don’t forget to close that trade out when you are in the green.
Learn Technical Analysis
Now, learning technical analysis isn’t a sure bet to winning trades despite what some traders think. It helps though, that’s for sure. If you find you are holding trades for too long, learning how to ready support and resistance levels can help you immensely.
Even if you just learn those basic skills, you will find that you can begin to predict when a trade might turn. Of course when it comes to trading the more you know the better. Basic technical analysis can help you to learn how a stock might behave based on how it has in the past.
Why Do We Hold Losing Trades Too Long Conclusion
It’s the bane of every new trader’s existence. We can’t even deny it because we all know it is the truth. Holding on to losing trades for too long is nothing to be ashamed of. It happens to the best of us! Part of it is human emotion and psychology getting the best of our trading decisions.
Once we are able to master those emotions, there is a good chance you will realize you can move on from a losing trade. It doesn’t mean you are a bad trader.
In fact, quite the contrary, experienced and skilled traders know exactly when to cut ties with a losing trade! Remember that as a trader, we must always trade to see another day! Happy trading!