Hope – The Killer of Trading Balances.
For most traders, the process of trading is a highly individual experience. They sit in front of their computers, weigh up risk and reward, probability, pattern strength and other factors before committing themselves to a specific position. Often they experience a buzz of excitement when they are just about to enter the trade, followed by anticipation of profit or loss.
Depending on the type of position a trader is in, what happens next can bring on a roller coaster of emotions and experiences. If the trade goes up, then typically positive emotions are experienced. If the trade goes does down, negative emotions are experienced.
Expert and experienced traders set their stop loss positions and exit their positions with discipline.
Novice traders or even expert traders who have had a few losses in a row, sometimes hold on to losing positions in the hope that those positions will come back to them. The lower the price goes the more intensely the novice trader will hold on to that hope.
Often when novice traders are holding on in hope, they will do a number of things. They will research company reports and announcements to convince themselves that staying in is a good thing to do. They will look at comparisons between the fundamentals of their losing stock and those of comparable companies including relative valuations and stock prices. They will talk about the underlying upward trend of the commodity/market even when their position is going counter to the underlying upward trend. All of these behaviours are symptoms of traders attempting to justify to themselves, the hope that the price might come back to them.
This rarely happens. Hope has destroyed far more trading balances than exuberance.
From talking to many traders, the common response is that novice traders hang on in hope. This almost invariably destroys large chunks of traders’ trading balances (if not the whole trading balance) and they have to become a super trader in order to make back their losses. Trading then takes on a whole new level of difficulty for which the novice trader is normally unprepared.
What to do if you are hanging on in hope.
First, if you find yourself hanging on in hope for a position to turn around, ask yourself a number of questions.
Has your losing position hit your 2% loss limit?
Most trading educators recommend a loss limit of 2% of the trading balance. If the loss on any one position exceeds this amount, the position should be closed out. If the answer to the previous question is “yes”, you should exit it immediately.
Does your trade conform to the rules of your trading plan?
If you don’t have a trading plan then you should exit all your positions immediately and write one. If you do have a trading plan and it is within your rules, manage the position. If it’s outside the rules of your trading plan, you should examine closely what you are in the trade for.
Finally, is the probability function with the trade or against it?
The probability function is the probability that the trade will work. This changes constantly over time, hence it is described as a function. If the probability is against a trade succeeding, such as if you are going long into a falling market, then you should consider cutting your losses. If the probability is with the trade, as when the market is going higher and you are long, then you could be experiencing a temporary retracement and the position may be worth holding.
If you are still holding the position after answering these questions, then you are probably either experiencing a manipulation pattern or you are clinging desperately to the hope that it will turn around and you will achieve the results you want from that choice.
As traders, our results come from the combination of how well we are seeing the market and how well we are managing ourselves. By understanding the market and ourselves, we can profit from the limitless patterns that present themselves constantly.
