Fear of Loss & Fear of Letting a Profit Turn to a Loss
In whatever areas of life we all fear loss. We are afraid of losing our loved ones, our pets, valuables, money and even our job. Yet most of us do not prominently think about those fears regularly, because if we did how would we ever progress? Because every future outcome is completely unknown in the present (some would argue this) there are risks to consider, and there are no odds that offer a 100% guarantee of winning. Therefore, the thought of a loss is always in our minds.
The 1972 Miami Dolphins went through the entire season without a loss, part of their success was not worrying about it. The New England Patriots nearly had a perfect football season in 2007, and along the way while they were confident each week, though there was always a fear of losing - for them, it was the last game of the year that was devastating. They felt the year was failure. Yet, the 1985 Chicago Bears lost 1 game all year long (mid year to the Dolphins), and finished on top as the Super Bowl Champs (beating the Patriots!). The point here is this, a loss is not devastating to the end result, and in trading or investing the ultimate goal is to grow an account. It doesn't matter how you get there, it's that you DO get there.
'It's not whether you get knocked down, it's whether you get up.' Vince Lombardi
In trading, we all have losses. We accept it as part of the game, as trading is not a game of perfect. But another quote from Lombardi applies: Perfection is not attainable, but if we chase perfection we can catch excellence. This is what we want to achieve - EXCELLENCE! Look, a loss can certainly set you back financially or even emotionally, but if we have the right controls in place (money management, risk management and trade discipline) then any trading loss should only be a small stinger. A devastating blow is tough to overcome, but look again what Lombardi said about getting back up.
There is no reason to fear a loss, but one major sin is allowing a profit to turn into a loss. We've all done it and every one of us have regretted not pulling the trigger earlier. Oh, why didn't I sell it yesterday when I had a gain? Hindsight is always 20/20, right? Yet if you had a plan in place PRIOR to opening the trade and actually followed the plan then there might not be any regret. How do I cut my risk of this painful feeling? My FIRST rule is to take half of my options trade at a double (up 100% or more) - no questions asked.
This allows me to put my original capital back in my pocket and take a 'free ride' on the rest. In this instance I cannot lose on the trade, even if the remainder goes to zero. My mind is totally free of worry as I am now playing on the house's money. While some of you may have other rules for taking profits - that's a good thing - keep refining what makes you comfortable and satisfied. Selling is one of the hardest but most liberating exercises, and taking profits without regret or fear of loss empowers you to be a better trader.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.