How to handle losses in trading! To your surprise, youve just lost Rs10,000. Naturally, you feel guilty and angry. You wish it didnt happen. You try to justify it: Its just the tuition you pay to become a master trader. You need to go in expecting to lose. Its the nature of the game. As useful as these statements are, though, mulling them over isnt helping today. You think, Rs10,000 is a lot of money. I cant just write it off, consider it a minor setback and move on. As hard as it is, thats what you have to do. As a trader, you have to think of the big picture, and hope that if you work hard enough, and make enough trades under the right market conditions, youll come out ahead. That said, it isnt always that easy. The dynamics of risk aversion and loss run deep. Do you have trouble taking a loss? You are not alone. Large corporations have trouble taking losses too. Behavioral economists have shown that companies go bankrupt rather than admit that their corporate identity and business plan need reworking. Bankers refuse to write off bad loans because they dont want to admit to their superiors that they mistakenly lent it to people who were a bad risk. And institutional money managers leave losses on paper because they are afraid to own up. As a short-term trader, the losses you take may be a fact of life, but that doesnt make them easy to handle. Feeling guilty over taking a loss isnt irrational. Indeed, its been adaptive throughout human history. Theres a strong biological urge to protect yourself and your loved ones. For tribes of hunters and gatherers, it meant obtaining food and shelter and protecting those resources from loss. In modern times, it means having enough money to pay for food, clothes, and housing. So when you lose money, even as a professional, active trader, it hurts a little when you think of the resources the money can purchase. Its adaptive to think in these terms. It was part of your upbringing. Your parents and teachers taught you to protect yourself and your family, and to do that, you needed to make money and save it. When you lose money on a trade, you naturally start to feel guilty and a little panicked. It is as if you are unnecessarily risking your safety and that of your family. Its quite understandable, but if you would like to e a successful professional trader, you must change your thinking regarding this issue. You must fight against your natural inclinations and learn to take losses. So how do you beat out years of upbringing? First, admit that you feel guilty and why. Youre guilty because you are taking a risk that may inadvertently harm you or your family. Admitting the potential adverse consequences helps. Its hard to take these responsibilities lightly. For example, its going to be harder to accept a loss if you really need the money to pay for basic living expenses, rather than money that is set aside for trading. Ideally, you should only trade with money you can afford to lose. If you know that youve done everything to minimize risk and you truly know that you can survive a worst-case scenario, youll be able to take a loss more easily. You should also address the psychological side of accepting losses. First, put the money you spend for trading in a different mental compartment from the money you allot to your personal life. Second, identify and refute assumptions about risk and loss. It may be useful to make a list of justifications that you can read after you have lost: Losses are a business expense. Its like a personal investment in your trading business. Its like paying tuition in order to learn important trading lessons. These sayings may not work at first. Its hard to change your expectations over night. It takes practice. Thats why you should actually write down these sayings about losses, and read through the list when you feel guilty about a loss. Losses are a fact of trading life, but they can be difficult to accept. Youre fighting against natural, adaptive inclinations.. SOURCES: TEI
Posted on: Sat, 02 Nov 2013 16:35:51 +0000
Trending Topics
Recently Viewed Topics
© 2015