Losses in trading

Studies carried out by psychologists have shown that the fear of losing money is greater than the pleasure we get from winning the same amount of money, and that people prefer not to lose than to win.

In other words, the emotional intensity of losing, for example, u$s250 is greater than that of winning the same u$s250.

The vast majority of people prefer to risk little or nothing in exchange for small gains, thinking in terms of profit. In terms of risking more for the possibility of making a lot of money, even fewer people want to do so. But when talking in terms of losses, people tend to increase their risk in order to lose as little as possible or to avoid loss. This is why there are traders who, when their trade turns around, do not close it, even if the losses accumulate.

It even happens that because they have losses, there are people who take revenge against the market (it is the worst thing you can do), and open new operations trying to win what they have already lost, but made with no study, without stops, putting more money than their management allows them, among others, which causes them to take more risk than they should, and most of the time, leads them to realise that their loss is much deeper than before.

This is how our brain works, so in order to have a low risk we must analyse and study the investment and have clear rules so as not to fall into these psychological traps. In addition to control our emotions, and not them to us. Of course, achieving this is not easy, as losing hurts. Therefore, a trader’s job is to try to predict what the price will do (this is market psychology) through his analysis, hoping for the best but knowing clearly that he may fail, and therefore make a loss.

Don’t worry, in this chapter we will talk about trading and emotions, and one day you will notice that you are no longer afraid of losing, but that you take it as something that sometimes must happen and is inevitable. Moreover, you will not feel pain for losing. You will take it as a matter of course.

To achieve this, it is necessary to master your emotions, because you can positively influence your own way of thinking, taking into account the following:

How to Overcome trading Losses

1) Think of a trade in terms of losses

Before entering a trade you should establish how much money you stand to lose on that trade. In this way, you assume that there may be a loss and how big it will be. This makes you take it more naturally.

There are many people who only think in terms of profit, without being aware of the potential loss they could make. At the end of the day, it is your money and there is always the possibility of losing it.

2) Learn to live with losses, thinking that they are part of the job

There are strategies that require living with losses, such as dividend investing, or long-term Buy & Hold. Sometimes the stock market goes up and sometimes it goes down. As Warren Buffett says “Unless you can see your stocks fall 50% without having a panic attack, you should not invest in the stock market”. This refers to long-term investments. A long-term investor should stay focused on his strategy, and when the stock market goes down he should be looking for better prices for his investments. Remember that when the stock market goes down, many long-term investors buy good companies at good prices.

Finally, also keep in mind that the market gives random rewards: a trader can trade badly and make money, or he can trade well and still lose money. What this demonstrates is that while you should aspire to be a good trader and get better and better at it, losses will always be part of your profession.

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