No one walks into the world of stock trading with the intention of running into stock losses. Yet, some investors do find themselves in a position where the results after months or years of trading seems to be just disappointment. More often than not, this results from an unwillingness to let go of old strategies.
This is particularly relevant for market investors who continue to hold on to losing stocks until their stock market losses significantly pile up. Despite incurring heavy losses in the share market, these investors continue to hold on to a losing investment and remain unaware that their positions might be costing them a great deal.
A popular saying in Wall Street says, “Cut your losses short and let your winners run”. Simply put, it refers to the simple strategy of letting go of losing stocks and instead focusing on the ones that are doing well. With the current state of instability in the market, it is more essential than ever for a stock investor to know when to cut his losses short and how.
To help you along the way, here are some important considerations that an investor must make to learn how to cut his losses short.
Stay Away from Over-Trading
It is often the case that when an investor incurs stock market losses in trading, he is immediately tempted to make up for them by trading more. However, this can be a critical mistake. Trades done solely for the sake of making up for previous stock losses might lack the research and insight that one would have when trading with a clear mind.
This can also lead to a slippery slope whereby a person might indulge in overtrading without realising it. It is important to remember that the share market provides ample opportunities provided one has the patience to wait for them.
Focus on Risk Over Returns
The stock market is an investment arena whereby the right opportunity can result in substantial returns. These lucrative returns are one of the most important, if not the most important, reasons why traders choose to invest in the market at all. However, the returns of the market are always accompanied with a fair share of risk.
As market traders, it is important to first manage the risks to which one is exposed. These risks come in many forms, such as the percentage of your invested capital or the timing of your market entry. In order to enjoy future returns, it is crucial that these risks are analysed and minimised so that your trades can have greater odds of success.
Accept Blame When Required
A loss in the share market can often deliver not just a blow to one’s finances but to one’s sense of self-worth as well. Investors can often find it difficult to come to terms with the fact that they made an error in judgement with respect to a stock position. As a result, it can seem easier to direct the blame for the losing stocks at external factors, such as market conditions.
In order to learn when to cut your losses, it is important to take responsibility for each and every one of your investments. It is vital that as an investor, you accept complete control over risk management and take into stride the unfavourable judgment calls that you might make along the way.
Keep Track of and Analyse Mistakes
In a similar vein, traders must not only accept responsibility over their stock market losses but also formulate a plan to learn from them. The best approach to achieve this is to make detailed notes of trades gone wrong as well as the conditions that worked against your favour.
It could be that you exited the market too soon, or perhaps entered a position too late. You may have delayed the timing of a favourable trade or hedged your bets on a dud investment. The key is to analyse such missteps and eventually, learn from them. Remember – even the best traders in the market have made mistakes in the past, and strived hard over the years to never repeat them.
With every opportunity, there are chances of success as well as of failure. The stock market, with its various lucrative financial opportunities, is no different. The important thing is to learn how to identify red flags, exercise patience and find ways to learn from unfavourable decisions. With insight as well as time, you can develop a sense of when the right time is to cut your losses and sell your position off.