The adage of Murphy’s law states that “Anything that can go wrong will go wrong”. Participating in the stock market comes with its inherent pros and cons. As a new investor, it is essential to understand that despite a lot of analysis, expert guidance, and research, there still remains a significant possibility of bearing trade losses in the market – it is just how the market works. Markets, without a doubt, concur with Murphy’s adage.
Every trader or investor gets several bad deals on their stocks. The fact remains that you do not necessarily have to possess top-level multibagger shares in your portfolio to become profitable. While gains from stocks have no upper limit, the loss from stocks is limited to the value invested in them.
Yet, exiting a losing trade is more than just a financial transaction for investors. Along with the loss of money, it also has a psychological impact on the investor. And it is not unusual either.
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People generally tend to delay the acceptance of reality in case a loss happens. That's just how human psychology and behaviour works, and it works in financial scenarios as well.
Let us delve into some of the steps you can follow to exit a losing trade without much stress to your finances and mental health.
Stop loss trade
Stop-loss orders are the loss limits that an investor is capable of bearing. In these, investors sell their stocks at a higher or lower price concerning a predetermined price level for limiting losses. When the stock price matches the stop loss level, a sell order is placed, and the security is automatically sold at that price. Stop-loss orders work best because they anticipate a loss and give investors the control to limit loss levels. Developing a personal stop-loss strategy and using it effectively can help you exit a losing trade with minimal loss and risk.
Holding periods
One cannot discuss trading and exit strategies without considering the importance of the holding (retention) periods. Time frames correspond to the general methods of withdrawing money from the financial markets:
- Day trading: Minutes to Hours
- Swing trading: Hours to Days
- Position trading: A few days to a few weeks
- Investment plan: A few weeks to a few months
You must choose the investment holding period that best suits your market outlook. This will decide how long it will take for you to make profits and losses. You must follow the rules; otherwise, the loss risk on your investments increases. While the holding period can be lengthened and shortened to adapt to market conditions, a timely exit on a losing trade increases confidence, profitability, and trading acumen.
Market risk to reward anticipation
Set reward and risk targets before you start investing. It would help if you studied market charts of companies you are looking to invest in to identify the next resistance level affecting your market durability. This helps mark the reward target. Then find a price that contradicts your estimates if the security turns and hits it. This is your risk objective.
Now calculate the Risk/Reward ratio and aim for a 2:1 ratio; it is suitable for a sound investment plan. If your evaluation gives a percentage that is less than 2:1, it is a lousy trade opportunity, and you should move on to better ones.
Scaling exit
You need to equalise your stop loss to break even when a new trade moves to profit levels in the scaling exit method. It can boost confidence as you can now trade freely. You then have to wait until the price reaches 75% of the distance between risk and reward targets. This will give the option to exit entirely or in segments.
This decision depends on position size and the strategy used. For example, there is no point in breaking a small trade into even smaller pieces. So, it is more effective to find last-minute strategies that either eliminate the bet entirely or use the stop-at-reward approach.
Avoid emotional connection with stocks
The key to having an amicable exit from a loss-making trade is coming to terms with the investment choice. Even if your decision has resulted in a loss, you should be able to readily move on instead of gloating over the loss. Changes in stocks must be constantly tracked. When stocks start to go the wrong way, you must sometimes book losses and accept your bad stock picks. Do not ‘fall in love’ with your shares. Trade them if the fundamentals do not seem correct and reduce your losses. Booking losses or hedging them at an initial stage can help minimise loss.
Tracking the trade after exiting
Even after exiting a stock, it is essential to track it to spot a re-entry point. Once you leave a position, look out for any bullish indication of reversal, which can be a potential re-entry point. When using the stop-loss, you can sometimes lose your position due to price fluctuations. The volatility might hinder you from noticing a price rise soon after your exit. However, the effectiveness of stop-loss orders is proven as they limit damages in many cases.
In the end, a successful exit from a losing trade is significantly based on your analyses of market charts, a careful reading of the candlestick patterns, and re-entering a position if it suits your plan. If there is no convincing reason to resume trading in the same stock after the initial exit, you should look for new options and avenues of profits in the stock market.
