InvestorQ : Does it also matter how we manage trades when we go wrong?
Dhwani Mehta made post

Does it also matter how we manage trades when we go wrong?

Answer
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Crowny Pinto answered.
2 years ago


While how your handle your profits are important, how you handle losses is a lot more important. Your net profits are impacted more by badly managed losses than by badly managed profits. Let us look at a situation when a trader gets into a position and then realizes that he was wrong. For example, when your position goes into loss, it is all the more critical to manage your loss making position smartly. There are 3 cases where traders tend to make a mess of loss making positions. Firstly, traders tend to ignore the stop loss and continue to hold on to the position hoping for the stock to bounce back. That is something best avoided as a trader. Secondly, the more unacceptable scenario is when you average your position by buying more of the position at lower price levels. That means you are choosing to be wrong twice and also increasing your concentration risk. Thirdly, trying to overtrade to recover your losses when you are wrong is another cardinal sin most traders commit. The best of traders only get a few trades right. It is how long you hold your rights and how quickly you correct your wrongs that matter.