All investors and traders would have realized by now that the market will always have an unfair advantage because we have to pay a trading commission. Beyond that, if the current price drops below our entry price, our losses will amount to the difference in addition to the commissions. On the other hand, even as the price climbs above your entry, we must still account for the commissions and the potential profits that we might earn when we sell. In today’s post, we are going to explore some trivial detail and discuss its impacts on traders and investors.
The psychology when making losses
In general, selling at a loss is never recommended by any “experts” because the intent of selling might because of fear rather than objective reason. That said, I would also like to point out that the mere thought of selling at a loss feels far more detrimental than we imagine. Moreover, than just the additional cost when trading, the mere thought of making a wilful loss has always been counterintuitive to most people. Instead, most investors or traders would rather accumulate and average down in hope that they will either make a profit sooner during the next uptrend or break even sooner. The point I am trying to make is that the fear of making a loss is so daunting that sometimes it might derail us from making a legitimate move such as selling during a downturn or when the company is having a bad quarter.
The psychology when making gains
Few of us will feel happy when prices go slightly above our entry price and even if we did, it will be less than if we lose the same amount we gain. When making gains, we usually deduct the capital involved and focus on the absolute gains which will normally amount to tens or hundreds of dollars for the average trader. This is interesting as the thoughts that we have when making gains will always deter us from selling even when prices are reaching all-time highs. In fact, some of us might even be tempted to buy more at a higher price to profit even more as we expect the uptrend to persist. Looking at this from a third person’s perspective, I think it is extremely counterintuitive for investors to act in such ways as well. Logically speaking, traders should control their level of greed and sell when prices reach their reasonable targets but that is normally not the case the moment there is a huge spike upwards.
The ideal state of mind
If you think about it, the ideal scenario should always be logical rather than like the examples shown above. For example, if an investor expects the price of a stock to drop in the near term, he or she should sell even at a small loss to buy back at a lower price to avoid massive paper losses while still maintaining interest in the stock. On the other hand, if a stock price is heading north, then it will always be prudent to sell off parts of your holding to secure profits rather than buying more cause of personal greed and hype. The point I am trying to make is that our strategies and tactics should always make sense even when an unlikely outcome occurs. This is because having the wrong kind of hope can sometimes be more harmful than what we think.
Closure Thoughts
Lately, our weekly posts have become more of reflections and less exciting for some readers but I think it is still essential for both new and experienced investors so that we remind ourselves to act logically when we participate in the markets. In short, owning our mistakes can save us from making paper or even real losses down the road and I hope we can all reinforce such practices for the benefit of legitimate investing and trading methods.
