by Jared Levy on August 26th, 2010
One of the toughest things traders can do is admit defeat and just exit a losing trade, especially when they or their families are depending on trading income to live. From the perspective of market pundits or advisers, it can be even worse. Not only does their livelihood depend on trading success, but others are looking for guidance as well. One’s trading track record then becomes an even bigger matter of ego and credibility. Trust me … I have been there.
Another problem many of us face is not listening to what our gut is telling us. From the time I started trading, I have tried my hardest to stay in tune with my emotions, my money management, and my risk. I’ve also always tried to stick to the guidelines I set for myself at the onset of the trade. From time to time, however, I certainly break the “rules”… it’s inevitable.
I have never been a big risk taker (in the markets, anyway). Part of the reasoning behind this is that I recognize my faults and realize I am human. I certainly allow greed to sometimes control me but ultimately I need to be able to control myself. In situations where my back has been against the wall because I had no other choice, I couldn’t let my account fall apart. I needed to be able to just stop the bleeding, take the loss, and move on.
With large positions and big risk, you may have so much on the line, you bet big with the intentions of winning big. When the trade goes against you, the loss may be too big to stomach, forcing you to hold on. Then the spiral gets worse and worse until you either finally exit (in order salvage what is left of your account) or worse, the position expires worthless, leaving you with a fraction of what you started with, only with shattered confidence and reluctant to follow your plan in fear of reoccurrence.
Having a manageable* position comes in handy when you need to hold onto a position that may be oversold and likely to recover. *”Manageable” means that normal variations in the position on a daily basis are not driving you (or your significant other) crazy or compromising your financial health.