Trading is a two way coin: we win or lose. But then, no body, I mean, no trader wants to lose. No trader wakes up, have a warm or cold bath, wears his clothes, prepares his mind, sits on the laptop or trading desk for a few minutes or hours, studies the charts and then take an open position with the intention that, it will turn out bad. Nobody does that!!! In this article, we want to look at why traders find it difficult to close losing position.
Everybody that places a buy or sell prompt in his chart does that with the expectation, intention and trust that it will turn out just fine. However, the sad reality is that, not all trades always end as a winning position. Some come back in reds. More sad? Most times, we lose much more than we ever anticipated, may be due to the fact that our minds are often tilted to the reality that, ‘’we know how to trade’’. But then, even when we know how to trade, losing money is a very difficult feeling to handle. May be because, nobody likes to loose or be called a loser. But then, losing is an adventure in itself and is often regarded as part of the trading curve for everybody. So, why then are traders afraid to lose? The answer is because, it is always very difficult to close a losing position.
If you have actually been trading for up to three (3) months, you will agree with me that, among many things a trader cannot do, closing a losing position is one of the top-most in the list. May be because, we all go to the market with the intention to win. So then, what happens when we lose? Why is it so difficult to accept those loses? Does it mean that we are defeated and the market knows better than us?
Well, to answer these questions, we all need to know that trading is an adventure that many people cannot dare. It is not for everybody. So, closing a losing position is just one of the things that makes trading a forbidden venture for many.
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Why Traders Find It Difficult To Close Losing Positions
Here are some reasons why traders find it difficult to close losing positions:
1. The psychological and emotional Challenges that Losses Bring.
The psychology and emotional aspect of trading are two different dimensions that work together to build a stable trading attitude. While each of these dimensions plays a unique role, they are deeply interconnected and mutually reinforcing. The psychological aspect focuses on the cognitive processes, such as decision-making, discipline, and risk assessment. While these are essential for executing a sound trading strategy, it could leads to challenges such as poor risk management decisions (including a higher risk and lower rewards, no risk management decisions such as including stop losses during trading).
On the other hand, the emotional aspect revolves around how feelings like fear, greed, and overconfidence could influence the behavior and judgment of traders during trades. While these aspect of trading can be excised through self-control, it has led to situations where traders are ruled by how they feel and not necessarily by the realities of current price positions and movement.
When these two factors are not appropriately handles, it could lead to difficulties in closing losing positions. For instance, a fearful trader always tend to close winning positions early while losing positions are left to run. With the fear of losing money, he or she always end up losing the account. Similarly, an overconfident trader always feel that a losing position will reverse. With conformity to his feelings, he or she ends up losing so much that he often wonders what he does wrong. In reality, what he did wrong was to trade without a stop loss or to allow his or emotions to lead the way. Hence, to close losses early, a balanced checkmate is required for both psychological and emotional challenges that traders often face.
2. Because of Reserved Equities and other Backup Plans
While having a reserve equity is a very good boast in trading, it could also be a peril. For many traders who find it difficult to close losing positions, having a reserve equity serves as an unconscious reason why they become careless with the equity at hand.
A reserve equity is simply the money a trader uses to top up his trading account. It is usually funded and kept at the back office of a forex account and transferred into the trading account as the need for it arises. Since reserve equity can be as little as one USD and as much as 100,000 USD, many traders leverage these equity as an avenue to become careless. Hence, it is not out of place to hear many traders acknowledge that while loses are part of their trading curve, relying on reserve equity tends to reduce the anxiety and pressures that accompanies trading. Th.is robs a trader of his ability to think rationally and in a focused manner
Usually, when loses take place, the best way to address the issue is to tackle itthrough effective risk management approaches such as using a lower risk and a higher reward ratio, using a fixed risk and dynamic reward ratio, determining the number of trading positions to be taken per day per week. However, nurturing the idea of falling back on a reserved equity is never a factor that brings sustainable growth.
3. Poor Trading Skills
This is third reason why traders find it difficult to close losing positions. Poor trading skills is simply an art where a trader does not know which specific icons he can press or touch to close existing losses. This goes as far as knowing and becoming familiar with the trading environment and the trading icons.
More often, many traders do not know how to identify specific trading icons and keys. While this may seem trivial, it can be easily forgotten at the heat of a loss. Therefore, sharpening one’s trading skill also involve knowing the designated keys that can be used for prompt actions.
Furthermore, another aspect of poor trading skill is having a very poor approach towards trade management and capital management. What this means is that, many traders just take trades and allow it to run without defining its limits. When this happens, it is always very difficult to close losing positions because such trades will be allowed to run as long as there is equity. In most situations, these trades could run to a margin call level before some traders become aware of their poor trading skills.
To buttress this point, many brokers such as Deriv, Exness, Hot Forex and FBS have made it known that traders should only risk the money they can afford to lose. Similarly, some others suggest that more than 70% of traders are not successful with trading because of poor risk management. Why this statistics is believed to be true and is ever increasing, there is a dearth of effective fund managers or accountable traders. To redeem this, a trader needs to subject his trading to accountable precepts such as having a well-defined and easy to follow trading plan and possibly, an accountable trading partner, coach or mentor. Through these people, your trading skills can be upgraded and refined to birth profitability.
4. Overconfidence
This is a biased or an excessive and often unrealistic belief in one’s abilities, knowledge, or judgments. Overconfidence takes place when a trader has an inflated sense of certainty and competence about their performance. While this is a very slippery attribute among traders, it often lead to situations where a trader underestimates the importance of risk management, or when a trader choses to make decisions without fully considering alternative perspectives.
What overconfidence causes is that, it makes a trader to believe that losing positions can always reverse, not minding the percentage of losses incurred. More worse, it leads to situations where the trader adds more open positions to running positions that are in reds. When this happens, it becomes difficult to close losses because, it is easier to close a loss of 30 USD as compared to closing a loss of 100 USD.
The Benefits of Closing a Losing Position Early
We all close losing positions in two ways. One by doing it early or by doing it late. When we do it early, we have the following to be grateful for.
1. Preservation of capital
Preserving your trading capital is an important aspect of trading that can only be insured if a trader knows how to stick to a defined loss percentage. If this is not intentionally stuck to, losing the entire capital is just a matter of an emotional swing in the market. Therefore, to preserve the trading capital, sticking to the defined loss percentage sustainably is the only insured way to go about it.
2. Strengthens the resolve about sticking to a trading plan
Now, the most difficult part of assessing a trading plan is sticking to it. In other words, keeping to the terms of a trading plan is one of the most difficult things to do. May be because, when a trader takes an open position, he or she tend to develop this vague-infinity concept that a profitable position will continue to accumulate more profit while a losing position will somehow reverse back into profit.
While these may be true, it is not usually the case because a profitable position could reverse back into losses and losses can also reverse back into profit. When these happens, a trader loses a very part of developing a profitable trading lifestyle: discipline, focus and sticking to a trading plan.
Similarly, closing the trades according to the trading plan helps any to stay disciplined, focused, sensitive and observant even if the trade later goes in our direction. This is because, sticking to a trading plan is the best way to trace your profitability and loses sustainably. But when this cannot be traced, it leads to trading by emotions, hope or as the traders shows up in chart times.
The Consequences of not closing a Losing Position Early
When a trader decides not to close a losing position, one, some or all for the following.
1. Regrets
Usually, this is the first emotion every trader feels when he loses money. And regrets often come as wishes: he wishes he had better ways of managing his or loses; he wishes that he would have closed his losing position earlier; he wished that he had avoided trading that market; he wishes that he knew better trading strategies to make profits etcetera. Al these wishes are proofs that regret is real in forex trading and can be seen as an essential part of emotions that traders feel when they lose money.
2. Losing of accounts
When traders do not close losing positions on time, they always tend to lose their trading account.While such loses may be partial, it is out of place when 100% of the equity is lost.
Loss of trading account brings about regrets and the potential to fall into mental stress, grieve and depression especially when there is no hope of refunding such accounts. Therefore, to avoid sustainable loss, effective risk management modules should be practiced and kept.
3. Unconsciously Cultivating Revenge Practices and Habits
Revenge trading takes place when a trader immediately takes an irrational open position in a bid to recover some of his lost equity. Usually, when a trader incurs a huge or a sustainable loss, one of the first things he does is to think of how to regain his losses either by trading again, or by using aggressive means such as increasing the lot sizes. While this may have produced a result in the past, it often and in most occasions lead to further losses since it is always an irrational approach and a poor strategy for recovering trading losses. Therefore, cultivating revenge trading habits should be avoided by all means if further losses must be avoided.