This is a matter of human nature. Originally, I always held out hope for the market trend, believing it would surely reverse. I kept adding to my position bit by bit, with a growing anticipation. However, as the market continued to fall, my fear grew larger, and I became afraid of losing more and more. So, I painfully cut my losses, only to see the market reverse, and I was forever left behind right before the dawn.
It is because we are manipulated by our own emotions in trading, and the market capitalizes on this to act with impunity.
Below, I will specifically analyze the three reasons why we cut our losses at the bottom and then propose some solutions to see if they can be of any help.
1. Our choice of technical levels is not well-selected.
Cutting losses at the bottom usually occurs in bottom-fishing trades. We enter the market before the bottom arrives, which often leads to us being stuck halfway up the mountain. The longer our orders are trapped, the more our anxiety and fear intensify, making it natural to cut losses at the bottom.
When I first started trading, I don't know how many times I bottom-fished halfway up the mountain, only to cut my losses at the very bottom. Sometimes I had to mock myself, feeling like a harbinger of doom in the industry.
I am very familiar with this feeling, gradually losing confidence and patience in the market, feeling exhausted all over, being mentally tormented every day, losing more and more, and sometimes thinking that it would be better to just cut my losses and be done with it, not wanting to endure this mental torture. At such times, I often made irrational decisions.
I felt like a frightened bird, like a fugitive, where the slightest disturbance would make me shudder, having had enough of the torment, I was eager to escape, to cut my losses and flee.
Having a poor market entry point, bottom-fishing halfway up the mountain, and losing control of one's mindset are the main reasons for cutting losses at the bottom. Therefore, we need to improve our bottom-fishing techniques.
Firstly, there are many methods to determine the bottom. I have also written articles on this topic before, which you can find in my public account (Eight-Digit Garden).Secondly, it is absolutely essential to set a stop loss, because even the best bottom-fishing techniques are aimed at future market trends and cannot predict with 100% accuracy. A fixed stop loss is our protective wall, ensuring that our mindset never collapses, thus giving us the opportunity for the next trade.
2. Issues with the market and the market makers.
Sometimes, a failed bottom-fishing attempt may not necessarily be our fault; it could also be due to an extremely erratic market or being manipulated by the main forces.
Most bottoms go through a period of consolidation and shaking out before reversing. There is a technical term for this called "bottom building," which describes the market's fluctuation and consolidation at the bottom, forming a process of transformation between bullish and bearish forces. This process often involves rapid price increases and decreases for shaking out, and even fake breakouts to lure buyers and sellers.
This leads to a situation where one might catch the bottom but fail to hold on, resulting in a loss. See the image below for reference.
The chart shows the daily K-line chart of silver, which consolidated and fluctuated between 23.37 and 22.04 for two months, with several rapid upward and downward shakes during this period.
Such a trend is a great test of our confidence in the market's reversal and our patience in holding through the bottom-building phase. It also tests our ability to maintain a rational mindset during fake breakouts.
In terms of market trend characteristics, the shaking out at the bottom is more likely to cause us to sell at the bottom, which is also a cunning manifestation of the market makers.
As with the same principle, to deal with this situation, the only way is to set a stop loss, and if it's unavoidable, try to minimize our losses and exit.
3. The position size is also a significant issue.Additionally, there is another scenario that exacerbates the two aforementioned issues: our positions are too heavily invested when we attempt to bottom-fish. Whether we are caught in a mid-level trap or during the process of the market fluctuating and cleaning at the bottom, our accounts will incur significant unrealized losses. These substantial unrealized losses can severely impact our confidence, often leading us to think: "With such a large position, if the market doesn't reverse and continues to decline, we could suffer substantial losses. What if we actually incur real losses?"
This mindset of being overly concerned with gains and losses will certainly intensify our fear at the bottom and make us want to cut our losses prematurely.
Having too heavy a position can also lead to another issue: insufficient margin. In leveraged markets, as the market declines and unrealized losses increase, one might face the need to add more margin. Without sufficient funds, one could be forced to cut their losses at the bottom.
Most of the problems we encounter in trading stem from having too heavy a position. I experienced this early on; being fully invested inevitably leads to cutting losses at the bottom because the psychological pressure is too great. Being half-invested allows for a bit more persistence, while having a one-third position is less of a concern, and one can simply hold on for two years in a larger cycle to eventually break even with a small profit. This illustrates the difference in mentality.
