It is easy to take profits in a winning trade. You ring the register and figure out how thicker your wallet just became -- a very much enjoyable experience. But the same cannot be said on taking a loss in a lousy trade. To the struggling trader or investor, it means "How much did my brokerage account just go down in value by?", and "Have I made enough money to cover my rent or car payment this week?" -- questions which all induce stress just thinking about them.
Losses are unavoidable in daytrading and the key to making consistent big money is to keep the losses small in relation to your winners. I call this the art of taking a loss. It's an important skill that every daytrader and investor needs to master.
I still need work on this skill even after 19 years on the job. I am human and some days I tend to find myself reluctantly riding long positions lower and lower even though I know the tape tells me to sell it. "Hope" is what keeps me from taking a loss when I should. I keep on hoping that a big buyer will step in and clean up the sellers in a huge one million share block print (when riding long positions down). Hope in equity trading causes pain so the best way I tend to think of it is take a loss as robotically as you possibly can. Don't think, just do it. Taking losses are hard because you have to admit defeat and no one likes to be referred to as the loser on the trade.
Overcoming fear is another key to mastering the art of taking a loss. No one likes to sell out at the dead bottom. There are so many times where I have decided to cut the line and then see the stock rebound sharply immediately afterwards. Fear of selling at the dead low is something that a trader needs to just forget about. When you know the stock is going lower, just dump it without hesitation. Remember that you can always re-buy back in when you feel the stock is on the verge of rebounding. Fear of losing money is part of day trading / investing especially when you are in a long slump. I really can't say much about this but you will need a positive attitude and a few textbook winning trades and setups to regain back your confidence.
The more you take losses, the easier it is to do when you have winning trades offsetting the pain. Experience definitely helps in this game. Surprisingly there is a silver lining when taking a loss. I have been in some big positions where I am down six-figures on them. When I decide to just cut and run, my head now becomes de-stressed and it enables me to clear my mind and start fresh. I am able to move on and focus on digging myself out of the hole I just created. Seeing a stock continually descending in price after selling out also reinforces that my tape reading skills are still sharp as I sold because I knew the stock was going lower as sellers still dominate the tape.
The art of taking a loss is a skill that will take time to master. Stubbornness, fear, and hope can all cloud our trading and investment judgments. But with the right mindset and rules, knowing when to take a loss will help make you make more money in the long run.
- Hubert Tsai