Major Losing Trade: What Should I do?

Submitted by Marco Palmero on 6 May, 2008 - 10:37

Major Losing Trade - What Should I Do

I was asked recently about what they should do when you are trading and come up with a major loser of a trade. A major losing trade is a trade which you just let go to run its course. It is no longer part of your trading portfolio but has migrated into your investment portfolio by default. Instead of cutting your losses short as every trader should do, by calculating the exact stop loss level to exit at, you held on with hopes that the price will reverse and start heading the direction you wanted it to go to.

So lets say you got in at $100 – to keep the numbers simple. The stock is now down to $50. You but in $100,000 to start your initial position with 1,000 shares. You are now left with 1,000 shares worth $50 each and your portfolio is now slashed in half to $50,000. what do you do?

Your Choices When you Have a Losing Trade

Now I can’t tell you what YOU should do. That is your choice and of course you must do your own due diligence before you go and make any brash decisions.

What a professional trader would do (is not let themselves get cornered into a trade like that in the first place) is to simply exit ASAP. Yes, that means liquidating and taking the paper loss and realising that into real dollars. You’ve lost $50,000. That was a $50,000 down payment on your trading education. Or in a better perspective you’ve lost 50% of your trading capital.

Why should the professional trader exit immediately? Because the trade isn’t a proper trade anymore. It has become a rogue trade. If you were in a professional corporate environment, you would have been fired. But you aren’t. And this is self punishment. The trader would exit immediately for two reasons. For psychological and for opportunity cost reasons.

After a disastrous trade like this one your psychological err mental state of mind will be shot. No regular human being would have “no emotions” and just react to an event like this like a robot. If you haven’t exited yet, you wouldn’t be feeling this feeling of great loss because you haven’t realised the loss yet. You have reasoned with yourself that the trade has automatically entered your investment portfolio and all is fine and dandy. And this is where the second part of why the trader would exit immediately.

A Current Losing Trade Means Opportunity Cost

The trader would recognise that there is an opportunity cost in holding the shares (or other equity vehicle). For those who didn’t attend high school commerce classes, opportunity cost is the price of choosing one path/product/service/etc over the other or in other words, missed opportunities.

There are many opportunities in the market. To profit anytime a trader pleases. There are stocks and currencies rising and falling every second of the day. With stocks, there are companies with prices rising and falling 10 to 20 percent in one day. With forex, (with 1:100 leverage) you can profit 100% on your investment if the currency moves 100 pips. Yes this sounds so perfect, but its true. I’m not saying you’ll grab 100% of the next move but there ARE opportunities you are missing everyday, day in and day out, everyday you are holding your losing position.