Thursday, February 25, 2016

It Is Not Easy Getting Over a Loss

The art of living your life has a lot to do with getting over loss. The less the past haunts you, the better.
Richard Ford
After considering current market conditions and the condition of your stocks; you've decided to take a $1,000 loss. When this happens most of us experience anger, our ego suffers, and we wish it just didn't happen. You rationalize: It's the nature of the game; it's my tuition in trading school. You can't stop thinking, however, about bills that are due shortly or that planned vacation in a month. Thinking, $1,000 is a lot of money, I can't consider it a minor setback and move on. That however is exactly what you have to do. The dynamics of risk aversion and loss taking run deep in most of us. As a trader you must step back: look at the big picture, understand that if I work hard enough and under the right market conditions I'll come out way ahead. 

Trading the markets whether on a full time or a part time basis is a business, not unlike any other business. Yes, this business involves risk, but so to do all other businesses. Corporations, large and small alike, also have trouble taking losses. Behavioral economists have shown that companies often go bankrupt rather than admit that their business pan needs reworking. Bankers will often refuse to write off bad loans because they don't want to admit that they mistakenly lent it to people, or companies, that were a bad risk. Institutional money managers leave losses on paper because they are afraid to own up. Many investors will not even open their brokerage statements during bad times; "out of sight, out of mind." 

Feeling guilty taking a loss isn't irrational, it's human nature. There is a strong biological urge in all of us to protect ourselves and our loved ones. In today's world that means having enough money to pay for food, clothes, and housing. Therefore when we lose money as a trader it hurts, especially when you think of what that money could purchase. As children we were taught by our parents and teachers to protect ourselves and to do what you need to make money and save it. Losing money on a trade therefore will make us feel guilty, and depending upon the size a little panicky. As an active trader you must change your thinking. You must fight against your natural inclinations and learn to take losses. 

Perhaps the first step is to admit to yourself that you feel guilty. Realize the guilt is the result of you're taking a risk that could inadvertently harm you and your family. The loss is particularly hard to accept if you really need the money to pay basic living expenses as opposed to money set aside for trading purposes. You should never use money set aside for basic living expenses to trade. If you know that you've done everything to minimize risk and you truly know that you can survive a worst-case scenario, you'll be able to take a loss more easily. 

Mentally put your trading capital in a different compartment from the monies set aside for your personal life. Learn about risk management Risk Management - An Introduction and build up enough capital for trading. 

Next identify, then refute, assumptions about risk and loss. Make a list of justifications that
you can read after you have lost: "Losses are a business expense"... "It's like a personal investment in my trading business"... "It's like paying tuition in order to learn important trading lessons." These sayings may not work at first. It's hard to change your expectations over night. It takes practice. Losses are a fact of trading life; they still can be difficult to accept. Remember you're fighting your own natural biological forces!

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