Four common questions we ask ourselves while holding a losing trade

In today's article, I am focusing on four questions that many of us most likely ask themselves when facing a floating loss from a losing trade order or series investing in financial markets.

Victor Tomov | 07:30, 2019/05/29

Dear aspiring investors,

No matter how significant is our trading experience, one thing is for sure - we all face losses sooner or later when investing in financial markets. There is no trading strategy that can be 100% right all the time. It does not work like this in trading. Although this is pure common sense, it's quite challenging to accept it when we face a floating loss generated from a losing position or series and remain calm with a cool head. In such a situation, we often ask ourselves the following four questions:

  • Did I make the right decision to enter the market that early?
  • Should I close my position now to avoid a loss?
  • Should I put a tighter Stop Loss?
  • Should I open another position in the same direction hoping for a reversal?

The quick answer to all of them is "it depends" as there are certain factors that could influence our decision:

The risk we have taken when opening the losing position - the size of the trade order, the margin it requires, the current margin level in our trading account, our total exposure, the funds we have and could allocate, the loss we could afford while holding the position. Doing the math before opening a new trade is critical for us to have the confidence that even if we didn't get it right at the beginning, we have some room to breathe.

The investment objectives we have when entering the financial markets - to get rich faster, to become financially independent, to have an extra source of income, to buy this fancy new car, to go on a long distance holiday with the family next summer and so on. The nature of your objectives will define your investment horizon (long-, mid- or short-term), style (intraday, swing, scalping, etc.) and strategy.

The lifecycle stage we are at - recent graduates, having family and children, career phase (starting, established, retiring). It's one thing if we are entirely on our own without being responsible for other people and another if we have a family with a few children and are responsible for the household budget. When we invest our hard-earned money, we tend to be much more sensitive to losses than if we won a lottery price or have other income sources not directly connected to our efforts. When we are young and ambitious, we tend to be riskier, and a 200 EUR floating loss seems not a big deal, which is not the case with the older ones of us.

The mindset and mentality we have when trading - the speed we want to see results from our actions, the risk tolerance (conservative or aggressive), the hazardous component in our behaviour, the confidence we have in our skills and knowledge, our attitude (optimistic or pessimistic). A mixture of culture, education and experience shape our decisions when investing, and we can explore such factors by self-reflection.

The diversification of our investment portfolio - the number of investment instruments on which we are willing to trade and have open positions. We know the old saying "never put all eggs in one basket". It can't be stressed enough how important it is to be able to diversify our portfolio while keeping an eye on our equity and margin levels to avoid overleveraging the account. Very often, losses in one market are compensated by profits in another. 

The list may continue, but let's look at some possible answers to those four questions to illustrate the diversity of outcomes and their nature.

Did I make the right decision to enter the market that early?

A classic example of the optimism vs pessimism case. Is the glass half-full or half-empty? Good or bad, we made our decision to open that trade, and now we have to accept it. If we see a potential for reversal combined with other factors such as a positive swap, we may be confident that the decision was reasonable. If we are too stressed about our circumstances, we may start blaming ourselves for being so short-sighted and premature in trading.

Should I close my position now to avoid a loss?

"Yes, I should do it" - the ideal answer if we are close to a margin call or do not like risking too much while answering the first question negatively. "I will keep it open for a while" is a standard answer when our account equity allows us much room to breathe, and we never invest the money we could not afford to lose.

Should I put a tighter Stop Loss?

Reaching this question means that we passed the test of the previous two and consider limiting the total risk exposure. Again, looking at the chart and the overall fundamental picture of the respective market could guide us to the right answer based on our account equity. Moreover, if we have diversified our portfolio to a reasonable extent, we may well limit the loss in a losing trade, offsetting it with a good profit in another. In such cases, we are most likely to answer this question positively. After all, closing a losing trade frees up margin for opening a winning one.

Should I open another position in the same direction hoping for a reversal?

There is always a piece of hazard in our actions when trying to prove that our decisions are right. The hope for a reversal is the main driving force for many of us when trading against the trend. When things get ugly, the temptation to confirm our strategy with another order gets high, especially if we can afford higher floating losses. Using technical indicators to analyse the market conditions and define the entry level is critical if you answer positively to this question. This new trade could be a pending order if you spot an approaching long-term price top/bottom or a stable resistance/support level. That's why it is vital to read technical analysis articles available.

There is no right answer to these questions and also no silver bullet. Investing in financial markets is complex but also could be very rewarding once we get a good grip of it. It comes with experience and reflection.

Warning:

Disclaimer: This article presents the personal opinion of the author based on individual experience and past results. None of its content shall be considered investment advice. Past performance does not indicate future results. It is your sole responsibility to decide whether to follow any presented techniques or approaches and neither the author nor Findilao Ltd can be held liable for an outcome from your actions.

Risk Warning: Trading Foreign Exchange and Contracts for Difference (CFDs) is highly speculative and may not be suitable for all investors. The leverage created by trading on margin can work against you as well as for you. Only invest with money you can afford to lose and ensure that you fully understand the risks involved. You should be aware that your investment may go down as well as up and you may not get back the full amount invested. Seek independent advice if necessary, before buying a subscription to use our services.

Victor Tomov has more than six years of extensive hands-on experience in the financial industry gained in different management roles. Passionate about marketing ethics and confident in the success of any customer-driven organisation, Victor leads Findilao's business operations since the company's establishment in early 2018 offering diverse solutions for sustainable investment growth that help investors make wise decisions and monetise financial expertise. He has a Masters in Corporate Marketing from the University of Economics in Varna, Bulgaria. Victor's strong analytical skills proved to be instrumental in the development of his views on trading.

Victor Tomov has more than six years of extensive hands-on experience in the financial industry gained in different management roles. Passionate about marketing ethics and confident in the success of any customer-driven organisation, Victor leads Findilao's business operations since the company's establishment in early 2018 offering diverse solutions for sustainable investment growth that help investors make wise decisions and monetise financial expertise. He has a Masters in Corporate Marketing from the University of Economics in Varna, Bulgaria. Victor's strong analytical skills proved to be instrumental in the development of his views on trading.