Trading Educators Blog
There are at least three things you can do to avoid mounting losses:
1. Write off a relatively small loss
2. Admit your mistakes
3. Don't let the desire to protect your reputation interfere making logical trading decisions.
The three are common human shortcomings, and you need to be aware of them. None of us are immune and if you are not aware of these weaknesses you will not be able to keep them from messing up your trading plans.
Traders as with all people, are naturally risk-averse, some more than others. Traders don't like losses and they tend to do whatever they can to avoid a loss. But it's often better to just write off a loss, rather than hold on to it and let it grow. It's hard for people to face losing money.
Traders will do whatever they can to avoid taking a loss.
Another human frailty common to traders is that they have a need to be right. They don't like admitting they made a mistake. For many traders, the first line of defense is to deny to themselves or others that they are in trouble. For example, when things have happened to mess up your trading plan, it's better to simply admit things have gone wrong, think logically about what to do next, and do whatever it takes to get yourself out of trouble. Don't try to hide your mistakes. A simple mistake can grow. Trading problems which were small at first, can turn into big problems that have long-term consequences.
Finally, there is a powerful need to protect your reputation as a trader. It seems traders will do just about anything to save face. Saving face is extremely important in some cultures even to the point of suicide. But for most of us we simply want to hide losses from spouse, family, or friends, especially if we have been foolish enough to brag to them about our trading. It's better to stay humble. Humility will enable to handle a severe drawdown when you experience one. Be willing to admit your limitations to yourself and to others. Everyone has them, and so do you. Try to be humble, honest, and ready to face your own shortcomings as a trader. If you can do, you will have a better chance to be consistently profitable.