“It’s not a loss until you sell.” “I’ll sell when it starts going back up.” “This is a great company, I’m in it for the long haul.” “It’s cheap at these prices I’ll just buy more down here”. “I’m going to be so rich whenever this goes back up.” If this sounds like you, you are a bag holder.
No one likes to admit they were wrong about an idea. People become prideful, and will often defend their beliefs even when there is substantial evidence they were wrong about an idea. A bag holder is someone who is holding one or multiple losing positions in stocks, and hasn’t sold.
In trading, pride and stubbornness are two very costly traits. To become a professional trader, you have to get used to being wrong often. No one can win on every trade. For this reason, you always need to have an exit strategy if a stock goes against you. Taking small losses is part of the profession. If you are a bag holder, you will never be able to make a living trading stocks. Here are 3 signs you are a bag holder:
1. Holding Big Losing Positions
If you currently own any stocks where you are down 20% or more on your position for multiple months, you are a bag holder. There is no reason to ever be down this much on an investment. The most common reason why people end up holding big losing positions is that they didn’t have an exit strategy. You freeze up because you didn’t make an exit strategy, and don’t cut the loss when it was small and manageable.
Then the losing position becomes so big that you didn’t want to sell, because the loss is too big and painful to realize. Always have a stop loss, no matter what time frame you plan on holding an investment. Do not justify holding a 20% losing position just because you tell yourself you are a long term holder. There is a huge opportunity cost to holding big losing positions for an extended period of time. You could be using the money locked up in that losing trade in a winning investment instead.
2. Turning Short-Term Trades Into Investments
I used to do this all the time when I was a new trader. I would turn a day trade into a swing trade because I didn’t want to take the loss on the day trade! I’ve also seen people turn losing swing trades, into multi-year holds. The story usually goes something like this: You find a random small cap biotech company you saw someone pumping on Twitter. You do a little research, and everyone on Stock Twits is saying that it is the next Amazon.
You buy some shares. Immediately you go up 30% on the position, and you are convinced you are a genius, and this is heading to the moon. You don’t take any profits, because you think it will go up 30% every day. The next day it reverses and you are back to break-even. You tell yourself it’s going to go back up. A week later, you are down 40% on your position. Next thing you know, you find yourself sitting on all the quarterly conference calls, praying they release news of a buyout.
3. Defending Your Losing Positions
Bag holders care more about being right than making money. They think that as long they don’t sell, it doesn’t count as a loss. The whole point of investing in the first place is to turn money into more money. Who cares about being right. Even if you really believe in a company’s fundamentals, it does not mean you should buy shares of the stock. There is more to making money in the stock market than just buying companies with good fundamentals. It is knowing timing. Knowing when to buy and sell at the right times. Don’t be a bag holder and hold a losing position just because you are stubborn and are afraid to take a loss. Take your money out, and invest in education so you can learn how to trade properly.
If you're currently any of these three do not panic. We all get in sticky situations here and there as traders but we must use these as learning lessons. Risk management is your best friend as a trader so make sure you use it for every move you make.
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