How to Deal With Losses on the Stock Market?

How to deal with losses on the stock market? Is a good plan enough to handle emotions?

Financial markets are very strange. On the one hand, we can predict many things (e.g. how much we can lose on a given position if the chart goes in the opposite direction to what we expected), but on the other hand, this knowledge is not enough. We are often overwhelmed by emotions, which often cause us to make bad decisions. Is it possible to deal with it?

A plan is essential. If we have prepared the moment of entry and more or less know the place where we want to close the position, it should be a little easier because nothing should surprise us. However, we often make the mistake of not accepting the loss. And even if the chart is at the point where we should close the position, we hold on to it in the hope that the situation will reverse. We deviate from our strategy.

Read also: What Have I Learned after 15 Years in the Market?

The result is that we go wrong and start to be guided by emotions and wishful thinking instead of continuing to follow our strategy. It is not possible to make a profit on every position. And losses on some positions are part of the game and we have to accept them. Just as we have to incur some cost to make a profit (e.g. in the sale of goods).

We treat the financial market differently. We compete. Not only with the market, but also with ourselves. We do not allow ourselves to think that we have made a mistake or that the market has decided to go in the opposite direction, even though all the signs in the sky and on earth indicated that we might be right. The concept of “right” is relative on the market because irrational things happen there that cannot be explained in any meaningful way. Besides, it is pointless to explain after the fact because you cannot make any money that way.

So how do you deal with losses?

There are two options. If we have entered into a transaction in line with the long-term trend and it is not too high, we can try to hold on to it.

The second school of thought is to cut our losses immediately when the market goes in the wrong direction. This option seems to be better because it saves us the stress. And nothing frustrates us more than being stuck in a loss.

Cut losses

Cutting losses can also be beneficial for another reason. We admit our mistake, we deplete our account, but we can look for a new opportunity to open a position with a clear mind. I know from experience that admitting a loss doesn’t take that long and is better for our mental health.

On the other hand, we have another problem that we have to deal with. We may have some resistance to re-entering the same financial instrument because the loss on that position is still on our minds. However, it is worth remembering that entering into a new position is a new game with the market and there is no point in referring to the past. It is a new hand that should have no connection to the previous ones.

The market does not remember that it beat us on this instrument. We should not think about it either. A new move is a new opportunity. In the end, what counts is the profit at the end of a period, not on individual items.

It took me a long time to realize that you can lose individual battles, but what counts is the end result. And that’s what I try to stick to.