Out of 10 people who suffer losses, at least 7 are due to holding onto losing positions, a problem as old as time in trading losses. Almost every time after a significant one-way market move, friends come to me lamenting their severe losses from holding onto positions, even to the point of blowing up their accounts.
This issue is widespread, with severe losses and a stubborn refusal to change, which is a common problem among many who hold onto positions. Today, I will discuss several reasons why people hold onto positions and strategies to deal with this behavior.
There are typically 5 reasons that lead to holding onto positions:
1: The issue of market trends, with many false movements.
Most market trends operate in a range-bound manner, with ups and downs. When an order is entered and it results in a loss, not setting a stop loss and holding onto the position can sometimes result in a smaller loss during a corrective move, or even a reversal that turns a loss into a profit. Orders that were supposed to be stopped out become profitable when held.
Additionally, there are many false breakouts. When the market breaks through a position that should have been stopped out, holding onto it can result in the market retracing and turning a stopped-out order into a profit.
With such experiences, not setting a stop loss and holding onto a position has provided tangible financial benefits, making people reluctant to stop out and preferring to hold onto positions.
2: Loss aversion.
No one likes to lose, as losing brings a sense of insecurity. It is in our nature to be averse to losses. For instance, the pain we feel from losing 1000 yuan in a trade is far greater than the joy of making 1000 yuan. This makes us naturally unwilling to face losses, hoping that the price will rebound, constantly wishing for "just break even, then I'll get out," always waiting for the day to turn a loss into a profit.
3: The unwillingness to admit mistakes due to self-esteem.Many of our traders often have great confidence in their own judgments and have a strong sense of self-esteem in trading. They feel that setting a stop loss is an admission of being wrong and believe that the market is just temporarily out of control and will eventually go in the direction they anticipated, as long as they hold on. Sometimes they even share their positions and directions with others, and when they suffer losses, they are unwilling to cut their losses for the sake of face and continue to hold on.
4: Emotional trading.
Previously, they were bullish on the trend, but after making a few long positions, they were stopped out by a downtrend, which left them numb. They began to act emotionally, becoming defiant at this point, starting to fight against the market. If you fall, I will insist on being bullish; I don't believe you won't rebound. As a result, after stubbornly holding on, they suffer severe losses and have no choice but to admit defeat.
5: Lack of experience and planning.
Most traders do not consider the issue of stop loss before opening a position, nor do they have a trading plan, let alone a complete technical standard for order profit-taking and stop loss. All opening and closing positions are based on feelings. When the order is trapped, they can still smile at first, but as it gets deeper, they start to think about cutting their losses, only to find it's too late. In the end, they give up, thinking that since they have lost so much, they might as well just keep holding, hoping that one day they will break even. However, the losses continue to grow, and they are completely unable to cut their losses.
Are there any solutions to these five problems of holding onto losing positions?
1: You need to understand the consequences of not setting a stop loss.
If you have not personally experienced the harm of something, you may have a fluke mentality and keep trying until you are battered and bruised.
But in fact, we have ways to personally experience it, such as through paper trading and backtesting. These are cost-free methods. You can just set a standard arbitrarily, without setting a stop loss, and stubbornly hold on when the order is trapped. As long as the time period is long enough, you will inevitably encounter a situation where an order is trapped for a long time, or even directly blown out by a one-sided market trend. You will realize that not setting a stop loss is not an option; there will always be a time when you face a margin call.
2: Have a clear method for setting a stop loss.You need to establish your own stop-loss criteria, at what position to stop the loss, and execute each trade according to this standard, so that the stop-loss setting is meaningful. After trading for a while and strictly stopping losses, you will have a different mental experience.
3: Have confidence in your own stop-loss criteria.
Having stop-loss criteria is far from enough. If you are afraid, entangled, and do not want to stop losses after a few consecutive stop losses, it indicates that you do not have confidence in your own stop-loss techniques.
To build confidence, you need to do these two things: one is to review your trading system extensively, knowing that your stop-loss techniques are effective and feasible. Although orders may encounter stop losses, the overall trading system can achieve profitability. The other is to have a clear understanding of your consecutive stop-loss times, knowing how many times in history you have encountered consecutive errors, how much the drawdown is, etc., so that you can build confidence in stopping losses.
4: Read more books and learn to control your mentality and emotions.
In fact, there are many books on trading psychology on the market. The mistakes people make and the experiences they go through are similar. The reason why many of us cannot succeed is due to insufficient self-awareness and not knowing how to solve our emotional problems, such as loss aversion, recency bias, gambler's fallacy, etc. These are common issues that everyone faces. Only by recognizing oneself can one correct problems, manage emotions well, use reasonable positions, and avoid heavy trading and emotional out of control.
5: Use order placement for trading.
After the order enters the market, we can directly place a stop-loss order. During this period, do not keep staring at the market. Maintain a certain distance from the market, do your own things, and let the software automatically execute the stop loss, not giving the opportunity to hold positions. This can greatly solve the problem of not being able to stop losses.
