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Economy

How to Deal With Trading Losses in the Stock Market

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In the stock market, there’s no denying that a trader will experience losses at one point or another during his or her trading journey because it’s inevitable. 

In certain instances where it involves significant trading losses, bouncing back from it may be easier said than done. That is understandable because the experience can be financially and emotionally devastating, but this also emphasizes the importance of learning how to handle losing trades.

Different traders handle financial and trading losses differently. Among inexperienced traders, some may let their emotions get the better of them, some may refuse to acknowledge that loss, while others may even incur even bigger losses in the hopes that “they will go up again”. 

While all of these are normal and the loss should be treated as a learning experience, what makes a world of difference is knowing how to handle such a situation so you can recover from it in the best possible way.

Coping Strategies

When it comes to stock market losses, Investopedia pointed out two categories of how traders usually deal with them – either by using dysfunctional coping strategies or sound coping mechanisms.

Dysfunctional coping strategies are not sustainable, and as a trader, should be avoided. It may include the following:

  • Suppression – suppressing negative emotions as a result of big losses in the stock market can have detrimental effects on the trader, which can affect other areas of his life such as his or her personal relationships, mental health, or even career.
  • Projection – while some may try to avoid facing the negative feelings associated with stock market losses, others may try to put the blame on someone else instead of taking responsibility for their poor trading decisions.
  • Denial – some traders may find themselves in an even bigger loss compared to before because of denial and self-delusion by refusing to cut their losses in the hopes that their investment will go up again. An experienced trader would tell you that in cases like this, it is better to cut your losses and move on by investing the money left in safer and sounder investments.

On the other hand, sound coping mechanisms are more meaningful ways of dealing with stock market losses and bouncing back as a trader. It involves coming to terms with the situation, learning from your errors, and trying to recover the losses over time by making better investing decisions moving forward.

Kinds of Trading Losses in the Stock Market

Just as there are different kinds of traders and coping strategies, there are also different kinds of stock market losses. While all of them can be devastating or overwhelming in their own way, any trader can make the most out of the experience and recover from it with the right mindset and the willingness to learn from it.

  • Capital Losses – A capital loss happens when you sell a capital asset at less than the cost of purchasing it. This most often happens when you buy a stock, the price went down and stayed down, and you decide to sell it to cut your losses.
  • Opportunity Losses – An opportunity loss is harder to quantify but is best illustrated in a situation where you spend a certain amount to buy stocks. A year later, the price of that stock remained somewhat the same and you decide to sell it, thinking that at least you didn’t lose anything because you still got back the amount you paid for. However, this is not true because you tied your money for at least a year and did not get anything in return. Take note that even bank deposits earn interest every year.
  • Missed Profit Losses – A missed profit loss typically happens with more volatile assets such as when you see their prices go up but you failed to take advantage of it in the hopes that it would go higher, only for the prices to retreat.  
  • Paper Losses – A paper loss happens when the value of an asset drops below the price you paid for it but in this case, you didn’t sell your asset. In a sense, your loss is only “on paper” and only when you sell the asset at a lower price than you paid for it will that “paper loss” becomes a “realized loss”. 

Different Ways to Deal With Trading Losses

There are no successful traders who did not experience stock market losses along the way. While nothing beats experience as a teacher when it comes to trading lessons, here are some things you can keep in mind to become more emotionally mature and disciplined when dealing with trading losses:

  • Take responsibility and make peace with the situation – You’re the one who made the loss, so make sure to own it. There’s no one else to blame, so avoid putting the blame on other people. Instead, accept the experience for what it is, and learn from it. 
  • Your losses don’t define you – Sure, losses in the stock market can be pretty devastating especially if they are pretty significant amounts, but as a trader, this is part of your journey. Don’t take your losses personally, give yourself a break, and remember that it can happen to anyone. The bright side to this is this is an opportunity for you to become a better trader if you handle it correctly. 
  • Analyze what happened – To do this, take a break from trading for a while so you can look at the situation with fresh eyes. Once you’ve rested, you can start figuring out what went wrong, review the decisions you made, and analyse what you could have done differently.
  • Have a plan and make it a good one – There’s only so much you can do after incurring a loss but the good thing about it is that based on that experience, you can make a good plan, or even a better plan than what you previously had, so you can do better trades moving forward.

Just like all other aspects of life, experience is the greatest teacher. Take all the lessons that you can from every loss and use them to your advantage in your future trades. The only difference between an inexperienced trader and  a seasoned trader boils down to experience and trading losses are part of that.

To explore trading, sign up for a trading account today at 1Market.

*Trading incurs a high level of risk and can result in the loss of all your capital.

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