In our ‘Investing and Online Trading’ stock market newsletter last week we discussed how the market can provide the most expensive education possible. We continue the theme this week by looking at one of the biggest pitfalls in the market – holding on to losing stocks.

Max Lewis, an experienced trader of 40 years and author of ‘Conditional Ordering Trading Strategies’ says:

‘If you stay attached to your stocks - they'll break your heart.’

In day to day life it’s ‘normal’ to be attached to our nearest and dearest, to our careers, to our home and favourite belongings etc. Warning: Bring these personal loyalty and stability traits into your trading ……. and you suddenly increase your risk of catastrophic failure dramatically.

Catherine Taylor, CEO of Powerhouse Coaching and Consulting (powerhousecc.com.au), is a Success & Leadership Coach, Process Facilitator and Educator. We thank one of her students and Catherine for their permission to share the following with you.

This week Catherine was approached by ‘Attached Trader’, who has been struggling with this very issue of attachment and wrote:

“I realized the other day that I was taking too many risks with my trading capital as I had 21 positions worth around $300k in total and as I don’t really understand the market very well yet . I was getting myself into a scary position. So I closed 17 of them down and took $4K in profit which was good but I felt like I’d lost my children and got a bit down about it………”

To which Catherine responded:

Dear Attached Trader

It’s my pleasure to be able to reply and I understand that Traders can play one of the ‘loneliest’ games at times – it’s just you and the market and it can seem like the rest of the world is sometimes waiting for you to produce an outcome – either success or failure and this is where your personal Self-Leadership is so important.

Good for you on managing your risk and exposure and taking 4K profits in the process of letting go of some Positions. It is possible to get attached to positions (hence it can feel like losing a child) and that, along with managing your risk, are things that we work through in ‘You In The Market’.

I have no doubt that you will be able to enhance your existing attitude and behaviour regarding these areas.

Being able to sleep better at night you will have a more rested body and clearer mind. You’ll function more effectively and ultimately feel happier in the process.

Have you ever observed someone in his or her late teens work and save really hard to buy a car? They are so proud of their acquisition! They feel like a giant when they are in it, they parade it like there has been no other like it. It is the focal point of their attention. They groom it better than they groom themselves. They invest more into the acquisition more than they do into themselves.

In short, they become their acquisition, in this case, their car.

Traders so often fall into the same trap however now they are typically a few years older, ‘wiser’ and more discreet, therefore they don’t make loud noises hooting around in front of their friends with their recent acquisitions yet the same principles often apply.

Often the Positions one invests in become closer than a best friend or child. Why? Because an incredible amount of who we are is invested into the position – time, energy, research, and analytical decision-making.

Often, giving up the Position we have taken can feel like we are losing a part of ourselves/our children. I know analytically that makes no sense what soever, but that is so often what it can feel like. It is critical that we are honest with ourselves and admit the truth of the situation and I admire your ability to do so.

I have coached many Traders who have struggled with implementing their Exit Strategy – some don’t even have an Exit Strategy. They have become their Position, they want to ‘prove’ how right they were by sticking to a decision that may have been a great one at the time they made it no matter how long it has passed it’s use by date.

“Know when to hold ‘em, know when to fold ‘em, know when to walk away, and know when to run.” - Kenny Rogers

In Kenny’s song, “The Gambler,” even though he is talking gambling, I think that these words are so profound for many Traders and the last thing many Traders would want to admit is that may have similar traits.

Every Trader has a myriad of ideas for improvement in their Trading System. The critical thing with any Trade is to watch how it proceeds. If it is not doing well, it may pay to walk away from it. Too often we see Traders who take a Position, find that it doesn’t work, but they just cannot let go of it.

The reason they cannot let go is that their ego is wrapped up in the outcome. That is, they think, “If this trade is not any good, then who I am, my intelligence and my decision making must not be any good.”

You may have invested an enormous amount of time and energy into researching the Position you have taken and in doing so, it becomes harder to “fold them” the longer you keep them.

The ability to develop and implement an effective and clear Personal Trading Plan will help you. As part of the process of deciding what Positions to take and how you will play them, carefully analyse and decide what you are willing to expose and set your Stop-Loss based on that.

It’s much easier to decide what your Stop-Loss ‘should’ be prior to taking a Position vs. when you have already taken a Position and you ‘are the Position’ and do not want to admit a loss.

Knowing when to fold them is just as important as knowing when to hold them; however, refusing to fold your hand and exit a particular Trade could be your demise.

If it helps you, then set up an automatic process# that will help you to quickly disengage from a Trade that just is not performing.

In the meantime, here is an exercise for you to do. Write up a list of all the wins you have had in regard to the area of Trading as a form of acknowledgment of yourself and your abilities. It is critical that you validate what you have learnt, done, and implemented. Acknowledge these things. If you don’t acknowledge your skills and abilities, over time, you can lose your ‘edge’ with them.

Be kind to yourself as you already have a taskmaster out there giving you instant feedback – The Market.