More Trading Errors
People lose money even during the strongest of bull markets. Here is one of the more common trading mistakes to which people are prone. This simply relates to a trader’s refusal to pay proper attention to risk management.
Small losses quickly turn into large losses:
A whole myriad of mistakes accompany this common trading faux-pas. Refusing to take a loss at all. Overbetting. Catching falling knives. Averaging down. At root, it’s probably because the average investor pays little mind to risk management. In a way, it’s understandable. The majority of those in the market today have only come into the market during the last 5 to 7 years. They have never really experienced a serious bear market. The only investing world they know is that of an ongoing bull market, where it’s ALWAYS okay to buy the dips, where a stock that craters ALWAYS comes back. But it is vital to recall that someone bought “UBid” at 121. And SOMEBODY bought “eBay” at 234. I hope it wasn’t you. You should only be buying stocks that are in an ongoing uptrend (hopefully not TOO far along however), or those that are bottoming out following a stiff correction. In other words, when you buy a stock it should be with the expectation that it will go up (otherwise, why buy it?). If it goes down instead, you’ve made a mistake in your analysis. Either you’re early, or just plain wrong. It amounts to the same thing. There is no shame in being wrong, only in STAYING wrong. If a stock does not quickly begin to move in the direction you envisioned when you purchased it, you should begin to question your reasons for owning it and you should immediately put it on a short leash. This goes to the heart of the familiar adage: let winners run, cut losers short.
I simply don’t understand the way some people think. Your stock and your portfolio is worth whatever you can sell it for, at the market, right at this moment. No more. No less. People are reluctant to sell a loser for a variety of reasons. For some it’s an ego/pride thing, an inability to admit they’ve made a mistake. That is false pride, and it’s faulty thinking. Your refusal to acknowledge a loss doesn’t make it any less real. Hoping and waiting for a loser to come back and save your pride is dumb. Your loser may NOT come back. And even if it does, a stock that is down 50% has to put up a 100% gain just to get back to breakeven. Losses are a cost of doing business, a part of the game. If you never have losses, then you are not trading properly. Most pros have two to three losers for every winner. They make money by keeping the losses small and letting the profits build. You should be almost happy to take a loss. It means that you have dumped an underachiever and have freed up that dead money to put to better use elsewhere. Take your losses ruthlessly, put them out of mind and don’t look back, and turn your attention to your next trade. The simplest way to prevent small losses from growing huge is through the use of “stop loss” orders.
