Why we add to losing positions

Pierre Charlebois over at FXStreet (in his excellent blog) talks about why traders add to losing positions:

We hate to be wrong. It’s that basic. Think about it. When was the last time you were really wrong about something. How did it feel? Did you feel embarrassed? Stupid? Like you should have known better? I know that is usually my first reaction.

It's true that most retail traders hate to be wrong.  Just look at the firestorm that erupted when a bunch of traders blindly followed an analyst's proclamations.  More than that, traders are embarrassed about being wrong.  We want to bravely proclaim that some currency pair is overbought, or ready for a breakout, and we want the rewards of being able to scream to the world about how smart we are.  Or at least brag to our friends. 

The problem comes when we have put so much money on that "great idea" that, when it starts to go against us, we not only look bad (hate to be wrong) but we are losing a crapload of money (embarrassing). 

Most of us are never taught to enjoy the process of losing (obviously).  Or the happiness that can come from making a bad decision.  But we should learn to find peace in being wrong; to discover the strength that comes from admitting our faults; to enjoy the profits that come from being responsible about how much we risk on a single position.

Last of all, because we want to avoid embarrassment about our trading, we often follow someone else into a trade.  That way, our decisions are not completely our own (in our mind).

Nothing is more dangerous than that.

P.S.  I'd love to have Pierre on the radio show to talk about this.

Comments

[Samuel Araki]

I've talked about it with Pierre on a few occassions Rob. Early on for me, it was not wanting to lose. The mentality is why get out for a loss when the market is "bound" to come back? When it keeps going against you though, natural inclination is to continue to resist getting out because the losses get bigger. As it continues to go against you, you get trading paralysis - the inability to get out of a significantly stupid position because you'll lose a ton of money. It's almost better psychologically to get margined out at that point ... you know what I'm going to continue this train of thought on my blog.

I think you see where I'm getting at though. I've been through it myself, and have seen COUNTLESS others continue to go through it. At this point I call it Brick Wall trading - I'll explain that in one of the chapters of a book I'll write in one of my lifetimes.

[Pierre Charlebois]

Hey Rob and Sam.

You both have excellent comments about human nature and trading and not wanting to be wrong.

I know when I make a good analysis I really have to watch myself and my ego because the flip-side is just as bad. I can become the 'I told you so guy' way to easily.

Cheers

[Rob Booker]

Sam,

It's absolutely true what you say about paralysis! Also, I have found that when I'm in a bad losing position and not closing it, that my mind is closed to other good trade opportunities.

I call this Trader Attention Deficit Disorder.

Rob