Trading Mistakes to Avoid – Holding Losers

We’ve already discussed how taking profits too soon can drain your account, despite the adage that “you can’t go broke taking a profit”. The reason why you CAN go broke taking a profit is because you are holding your losers longer than your winners. No matter how many trades you win, if your losers outweigh your winners, your account will slowly bleed out. If you’re not doing this then go ahead and skip this chapter. Ninety five percent of all traders, even some very experienced ones, do hold their losers too long.

Why does this happen?

It’s a psychological issue as much as a technical one. Taking profits feels good. It gives you an instant sense of accomplishment, a confirmation that you were “right.” Your instinct is to lock in those profits so that you don’t lose them in case the price moves against you, which often results in  leaving significant gains on the table. On the other hand, closing a losing trade is painful. It forces you to confront the fact that you made a mistake. So, instead of cutting losses quickly and keeping them small, many traders hold on, hoping for a reversal that will bail them out. Everyone would rather notch a win than a loss.

Sometimes you might see valid reasons for holding on to a losing trade. For instance, you might have bought XYZ while it was moving steadily higher above the 8 day moving average, betting on continuation, and you want to use the 21 day moving average as your stop out level. XYZ breaks below the 8 day and then makes a quick move down to the 21 (the timeframe is irrelevant). Your plan was to get out if it break the 21, but you notice that the 34 day MA is not too far below the 21, so you decide to give it a bit more room to see if the 34 will hold. As it approaches the 34 you notice that VWAP is right below the 34, and the 89 is a bit beneath VWAP. You’ve got all of those significant levels that can potentially act as support, so you decide to hold down to the 89 to give your original trade thesis more of a chance to work. XYZ ends up picking up steam and plunging  through the 34, VWAP and the 89.

While you definitely had some valid technical reasons for deciding to hold XYZ longer than you originally planned, the end result is that you held onto a losing trade too long. What would have been a small loss had you sold on the break of the 21, turned into a painful loss when you got out on the break of the 89. Of course, if you stubbornly end up hanging on past the 89, your account could take a substantial hit. If you keep doing this repeatedly, you’ll end up blowing up over time, especially if you also cut your winners quickly.

The tricky part of the XYZ example is that there are lots of additional factors (such as volume, news, options flow etc) that can give you reason to hold on to the losing trade longer than you originally planned, and by doing so, you might end up proving your original trade thesis and produce a juicy green trade. If you’re a newer, less experienced, trader, you are probably better off sticking to your initial trading plan and cutting your loses quickly. You can always get back in at a lower price later. But for the time being, you’ve avoided a big loss and, if the stock reverses right after you sell, you can either get back in or just move on to a different ticker.

Correcting the Problem

The key to overcoming the problem of holding on to losers is to prioritize discipline over hope (otherwise known as hopeium). Accept that not every trade will work out, and that’s okay. Nobody knows what the market will do in the next tick, so every trade you place is in essence a gamble. Your goal isn’t to win every time. It’s to keep losses manageable so that your winners can more than make up for them.

Start by creating clear rules before you enter any trade. Decide exactly where you’ll cut your loss if the trade doesn’t work and where you’ll take profit if it does. These levels should be based on technicals, not arbitrary numbers or emotions. The real challenge is then sticking to these levels once the trade is live.

What makes this hard? Fear and greed.

Fear convinces you to close winners too soon, and greed keeps you holding onto losers longer than you should. The solution is to remove emotions from the process entirely. Set your stops and sell targets, either mentally or in your trading platform, and respect them religiously, regardless of how you are feeling in the moment. When your stop hits, you’re out—no second-guessing.

What you do not want to do is start moving your stop further away when a trade goes against you. Doing so, in most cases, will just delay the inevitable and result in a bigger loss. If your original thesis was wrong, accept it, take the hit, and move on. You can always re-enter later if the setup improves.

Finally, evaluate your trades regularly. Look for patterns in your behavior, especially when it comes to managing losers. Are you hesitating to cut losses because you think the price will reverse? Are you justifying holding on because of unrelated factors? Identifying these tendencies is the first step to eliminating them.

The bottom line

Discipline is your best weapon as a trader. Cut losers quickly, let winners run, and stick to the plan. It might not always feel good in the moment, but the green color of your account will be all you need to feel good about your trading going forward.