The Number 1 Reason Why Most People Lose Money in Stock Markets
Have you thought how you lost money in the stock markets in the past? If you try to recall, you’ll probably remember the one trade that you lost big. These big loses are hard to forget. You have found the answer. The number 1 reason why most people lose money in stocks is largely due to a common weakness – the inability to cut loss.
Most people are aware that that to be profitable in trading, you’ll need to cut your losses and let your winners run. Managing your risk as I have shared in an earlier article is how you differentiate a survivor from a loser. They key to success is capital preservation. A big loss in one trade can wipe out your account and get you so demoralized that you might end up quitting altogether.
Though equipped with this knowledge, the sad fact however is that most people are unable to properly execute their stop loss even if they have a good trading plan and even set up a stop-loss target. Cutting loss has a soft spot in our emotions which makes it so difficult to execute. Here are some common reasons that pose as hurdles. You’ll probably find yourself fitting in one of those. It’s alright to find out now, as the self realizing will help you be more decisively in cut your next losing trade.
Let’s find out why and how you can prevent them.
Holding on to a paper loss is not realizing the loss, hence I will wait for the stock to rebound
There are two flaws in this thought. First, holding on to a paper loss is still a loss whether you materialize it or not. If you can sell the stock early when you incur a small loss, and buy back again later at a better entry, you’ll make more in return during the recovery. Hence, you make one losing trade and one winning trade. And better, you make a net winning trade out of the two trades. If you just simply hold on to the stock, you probably only be breaking even. Worse off, you will need to sit through the whole downtrend and wait till it recovers.
Secondly, the recovery may not happen. You’ll never be able to know when the stock will turn around. If everyone turns to short the stock, you’ll just be hanging on to a falling knife. There is also a factor of opportunity loss as your money could be put into another winning stock.
Disbelief that their prediction of the market is wrong
Many people get upset that they made a wrong prediction. They might have told their friends about a big trading opportunity and felt proud to have spotted it only to find that it turns out to be a losing trade. Fearing to admit their wrong predict and admitting the fact to their friends, they end up convincing themselves that the trade is right but just a matter of time that the stock will prove itself.
Well, no one has a crystal ball. There is no 100% prediction of where the market will go. The way market moves is sometimes not rational. There many factors affecting the market movements. A good stock could have been picked, but if the market is down, it will most likely pull the winning stock down as well. Don’t blame yourself and move one.
Another piece of advice, don’t go around telling your friends about your absolutely magnificent winning prediction, then you won’t have to explain anything to them should the trade go wrong. Tell them after your winning trade materializes!
Lack of monitoring
Many investors are part-time traders who hold a full time job. During some period when they get heavier workloads and they will inevitably spend less time on monitoring their stocks portfolio. They might switch from a daily maintenance to a weekly maintenance or sometimes even a monthly. When major market movement happens, they spend little attention to understand the cause, thinking that it is noise in the market. Second month comes and the damage is done, going pass their threshold.
Always remember that if you invest your money in the market, it becomes your second job that you will also need to perform. You cannot expect to slack in your job and get a big bonus, likewise for your trades. A good portfolio manager manages his portfolio actively and makes necessary adjustments to ensure the health of the portfolio. If you invest in the market, invest your time as well. Make use of tools to make trading more productive and time efficient.
What else can you do to prevent yourself from getting into the same trap?
Here’s some additional piece of advises.
1. Have a clear trading plan
This means that you will have a defined exit strategy when you are profiting. And more important, it means that have a defined stop-loss.
2. Pre-set your stop-loss and automate it
One way of removing your emotions is to enter a limit stop-loss order and allow your trading platform system take care of it when the stop-loss is triggered.
If the market gaps down, your stop-loss may not be triggered. This also means that you will be losing more than your stop-loss. Here’s the painful part. Initially it mean that you will have to…
3. Bite the bullet and kill the trade
Bite the bullet and get out of the trade. After some practice, you’ll get used to it when you see it benefiting your portfolio and you will no longer be so emotional trying to get yourself out of a losing trade.
This is where the emotional and psychology training comes into play. If you manage to do it with fashion, that’s where you have mastered the Zen of trading.
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