Thread by @tradersushma

🧵A Thread solely on Trader’s Psychology🧵

WHY DO TRADERS CUT THEIR PROFIT SHORT & LET THEIR LOSSES RUN?

A detailed analysis ~

#threadbytradersushma #trading #investing

1/18

2/18

The two basic mantra of successful trading is ~

🔹Let your profits grow big.
🔹Keep your losses small.

These two postulates though so simple is so very difficult to follow.

Why is it so?

3/18

There are two main problems with human mind when it comes to investing decisions:

1.Need to be right
2.Classifying profit as good & loss as bad thing.

4/18

NEED TO BE RIGHT

This trait was ingrained in us since childhood. In our school education system, only correct answers were rewarded marks. If we would score < 60% we were seen as a failure.

5/18

This mindset though useful in some activities proved to be fatal in investing/trading field. That’s why we as an investor/trader strive to be right instead of being profitable.

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PROFIT IS GOOD & LOSSES R BAD

It’s not so!

But having this mindset affects our ability to cut our losses short. Whenever the position moves against us, our thought process is triggered that losses are bad & they should be avoided.

7/18

So i/o closing the position at a small loss we let it run in hope that the market will reverse & our position will revert back to profit/breakeven. We stay with the losing position as we can’t stand the thought of actually closing the trade at a loss.

8/18

We think that the losses r not real unless we close it. Once the stop loss level is crossed over it’s harder to take the loss because that small loss has turned into bigger one which means bigger dose of something which is bad.

9/18

The reverse side of the story is that we book profits as soon as they show up. Our mind triggers the happy hormone of “I love profits”. That’s why there’s an urge to protect that profit.

10/18

So instead of letting that profit run we grab them on the first appearance.

This “profits as GOOD & losses as BAD” paradigm lead us to exactly opposite actions & results as that required for successful investing/trading.

11/18

What happens if we r staying with losing position just because we hate losses & book profits at the first onset?

We will never come to the category of top traders & investors & leave the field after few days/months of frustration.

12/18

So, what should we do?

We can begin by making permanent change in our investing psychology.

This requires commitment & proper plan. There has to be a written plan for the whole journey of any transaction.

13/18

Once u write down something it becomes more real for u. May be in initial days u may skip the written down points. But after writing for > 30 days, it’s easy to see the impact that it will protect your capital & also make u profitable if u follow it.

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Once u develop the discipline to cut your losses short, u can focus more on growing bigger profits. Unless u develop this discipline of setting stop-loss points & taking SL hits, all other aspects are insignificant.

15/18

Points to remember ~

✨Taking small losses keep them from growing bigger thus allowing u to remain in the trading game for long.
✨Losses r just another expense in investing/trading business. They r going to happen so better to take them in stride.

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✨Big losses can wipe out your trading capital.
U must never have heard of a trader who blew his account by taking small losses. But stories of account being blown due to large bets, wrong position size & humongous losses are abundant.

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✨Treat losses as weeds in your garden. They r much easier to take out when they r small. But if they grow with larger roots, they are quite painful to eliminate. So don’t give them chance to grow.

18/18
That’s all for this thread.

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I keep sharing useful threads on #trading & #investing
Stay tuned for the forthcoming ones!

Thank you!

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