Hoping to Break Even

​Jim has been holding a position for six months. A media analyst predicted the stock would hit $100 by the end of the year. He bought it at $75. It went down to $50, and it's on the way back up. During the recent interest in the markets, Jim is hoping that it will hit $75 so he can sell it and break even. The break-even point is critical. When you are on the losing side of a trade, all you can do is hope it comes back, but should you wait around and hope? Isn't it better to just cut your losses and move on?

When on the losing side of a trade, the break-even point inspires hope. Humans have a natural tendency to avoid risk and loss. When in the midst of a losing trade, many tend to hold on and hope that the loser will turn around and return to the break-even point, where there may be no profits, but at least there are no losses (but perhaps commission costs). However, hoping has disadvantages and it is wise to consider these disadvantages while trading.

There are many good reasons to cut your losses, rather than hope for the loser to turn around. When you are in a losing trade, you are rarely alone. Many other traders are also long, for example, trying to exit without a loss. And there are other traders trying to short as well, defending the same price area to protect profits. It's unlikely that you can be the victor of this contest, so the best choice is to just cut your losses, and move on to the next trade. But people can't do it. They hate losses so much that they hold on, no matter how many trades they miss because their capital is tied up in a losing trade.

Jim has been holding a position for six months. A media analyst predicted the stock would hit $100 by the end of the year. He bought it at $75. It went down to $50, and it's on the way back up. During the recent interest in the markets, Jim is hoping that it will hit $75 so he can sell it and break even. The break-even point is critical. When you are on the losing side of a trade, all you can do is hope it comes back, but should you wait around and hope? Isn't it better to just cut your losses and move on?

When on the losing side of a trade, the break-even point inspires hope. Humans have a natural tendency to avoid risk and loss. When in the midst of a losing trade, many tend to hold on and hope that the loser will turn around and return to the break-even point, where there may be no profits, but at least there are no losses (but perhaps commission costs). Hoping, however, has disadvantages and it is wise to consider these disadvantages while trading.

There are many good reasons to cut your losses, rather than hope for the loser to turn around. When you are in a losing trade, you are rarely alone. Many other traders are also long, for example, trying to exit without a loss. And there are other traders trying to short as well, defending the same price area to protect profits. It's unlikely that you can be the victor of this contest, so the best choice is to just cut your losses, and move on to the next trade. But people can't do it. They hate losses so much that they hold on, no matter how many trades they miss because their capital is tied up in a losing trade.

Many people, like Jim, just can't let it go. He blames fate and himself. He asks, "Why couldn't events go my way? I should have been more skeptical. I shouldn't have trusted my intuition. I shouldn't have risked so much." Jim's reasoning makes some sense. He feels disappointed for trusting himself and angry at external events for not going his way. He feels guilty for losing, as if he has let himself down. He wonders what he could have done to prevent the losing trade. He tries to pretend that it just didn't happen. He thinks, "Maybe I could have risked less or prepared for the trade more. I should have studied every possible factor that could drive the price down, and accounted for them in my plan." Jim's feelings are a natural response to the potential loss. The internal dialog that underlies his emotions is also understandable. He wants to undo this event that he views as devastating and humiliating.

How should Jim cope with these emotions? First, he needs to stand back and look at things logically, unemotionally and objectively. Right now, his emotions are clouding his judgment. A little distance, or even optimism, would work well right now. Sure, he risked money and now regrets it, but that should not make him think he has done something wrong. In addition, it wasn't necessarily a bad idea to do what he did. Losing trades are a fact of trading. Perhaps Jim should have thought of other factors that may influence the price or not listened to the analysts' forecasts. If he had objectively looked at the evidence rather than go with an unfounded hunch, he might have avoided the mess he is in. That said, experienced traders go with hunches, so doing so isn't inappropriate. And sometimes, analysts are right, so it isn't terrible to consider their opinion when devising a trading plan. But no one can know anything with certainty in the markets.