Learning from others’ mistakes is the privilege of geniuses, but what we will discuss is likely to have happened to you already, and it is possible to learn from your own mistakes. We will discuss not only the reasons, but also the fears and states that lie behind them. There will be several more posts on this topic: about other reasons for losing money, ways to eliminate these reasons.
Recovering Losses
You bought a token and it dropped, the loss isn’t huge yet but it’s unpleasant. Moreover, there have been many cases where the price returned. Self-deception starts about bravery and patience, many new arguments are found to support an open position.
Fixing the loss is harder than doing nothing. If you fix the loss and the price turns around and reaches the expected take-profit, it turns out you made two mistakes. Double pain. This is also an additional burden of responsibility that comes with every decision. The price goes in zigzags, the market is cyclical, I have a strong spirit, etc. We are inventive, the more intellectual we are, the more sophisticated the excuses.
Maybe, even when entering into a trade, you didn’t think about a negative outcome at all (that’s a topic for a future post), you tried not to think about it and didn’t set a stop loss or plan when you would exit in case the price moved significantly against you.
But now it’s happened. You hold on once, then twice, then a third time, and everything seems to be okay as the price returns. But eventually, you will face the fact that the price won’t come back. For those who trade without leverage on the spot market and deliberately ignore stop losses, relying on the idea that I’ll wait it out and bring the trade back to a profit, sometimes the price will return years later. This means that you are waiting for a positive outcome for years, watching as your investment decreases by tens of percent, instead of fixing a small loss. And then make a new decision and make money on new trades.
And then the loss becomes so big that the thought of fixing it becomes unbearable and at that moment, you have even fewer chances to accept the loss and start looking for a new, more successful trade. In other words, by delaying the decision to accept the loss, you potentially increases your loss and decreases your chances of getting out of a negative situation.
Price return – I am saved
Sometimes the price will return, and sometimes you will have the opportunity to enter at a much better price later. The second one we often notice less frequently, as it is also a painful moment when you are in a loss-making position and realize that if you had closed a few minutes, hours, days ago, you would simply have entered at a different, more favorable price later. This is remembered less often than the price return after a long wait, as this is not something one wants to remember.
Cognitive distortion in losing position
When you are in a losing position, you encounter cognitive distortion where you start searching for arguments in favor of the position being successful and good, and you interpret all news and new information through this distortion. It’s our way of avoiding the pain of recognizing losses.
Trading without stop-losses or with excessive leverage where one trade can ruin the entire deposit.
It’s gambling, all-in. It’s not always buying FTT with everything, it could be buying the entire DeFi portfolio tokens and they all simultaneously drop, their correlation is so high that it’s essentially one trade.
This way you can quickly increase your deposit, and your acquaintances will be envious of your profitability, but it will eventually end with one losing trade. Only one.
It is important to understand that this is not trading, it is gambling, a game of chance. The usual response to this is that all trading is a game of chance. But imagine you come to a casino, and in some strange way (for example, a familiar dealer), it happens that red comes out in 80% of cases. By betting 5% of your money, you multiply your deposit with minimal risk and realize your advantage. And if you bet all on red, you have the opportunity to quickly multiply your deposit, but with just one black falling, you will lose. Place 20 or more bets and you will guaranteed lose everything (or you may already lose on the first try, with a big failure).
The fear that your trading system is not so good. Another unpleasant fear lies in the reasons for this, which is very difficult to admit. You are afraid that your trading method, your analysis is ineffective and systematic trading will inevitably expose this. You can’t deny it, you have to admit it and work with it. And with the huge risks, you can attribute all the problems in trading to the huge risk. And psychologically, the huge risk is a sweeter choice than working on mistakes and refining the trading system.
Averaging
You bought or shorted something, and the price went the wrong way. You can buy more or sell higher (if you were short) and now the break-even point became much closer and the probability of a positive outcome increased.
Someone might say: well, this is the martingale (a betting strategy in gambling games based on the idea that the player raises their bet until they win), it works. And yes, it can be used, but systematically, pre-planning future purchases and having a plan to fix losses if the price continues to go against you.
When you average down recklessly, you simultaneously increase your position size and trade a large amount relative to the size of your deposit. This is a very cunning practice as you constantly improve your entry price and constantly bring the break-even point, the price at which you will start making a profit, closer. It is very tempting. When you succeed in closing a trade in the green, you often get even more profit than you planned.
However, sometimes the price does not turn around and you end up with a huge unprofitable position and as a result, losses that you did not previously anticipate. If the initial position size had been smaller, even if the price had remained at that level, the result would not have been as devastating.
Increase the stakes in a bad position.
There is another aspect here: by averaging, you are increasing the losing position if the position is in a significant loss, meaning you made a mistake, and your position setup, your plan or pattern did not materialize. That is, you have a position with initially poor conditions, and you are increasing your stakes. You don’t have to bluff here, it’s trading.
Averaging is very attractive. And I repeat, it can be used, but systematically, having previously thought out the levels of additional purchases (before the deal) and with a plan to exit in case of continued price movement in the opposite direction of the open position.
Translated from source – https://t.me/sanyaizdagestana
