Posted on March 3, 2009 - by Mandy Ong

Cutting loss is the hardest thing to do

In my many years of broking, clients never had much trouble taking profits, afterall, ‘a bird in hand is better than 2 in the bushes’. It is never too difficult to decide how much to take off the table.

However, when it comes to losses, it is a totally different story. Traders, retail or institutional, often find it very difficult to cut losses, holding on to a false sense of belief that it is a retracement and market will move back in their favour again. Why? It can be due to ego as cutting a loss means that the trader had picked the wrong trade, a losing one. Or it can be due to money, with the pain of losing x amount could be so great that the trader choose not to realise the loss and instead hold on to hope for a smaller loss. Whatever the reason, traders who have lost money very often regretted their lack of disclipline in trading, for holding on to a losing position longer than they should have.

Sadly, this does not just affect traders. When the US crisis escalated, the US governemt proposed for a vehicle to be set up to soak up toxic assets from the banks, but the banks refused. The assets will be sold at marked-to-market prices which were drastically lower than their book values and the banks did not want to realise the loss. Recently, as valuations continued to spiral downwards, talks emerged that the banks should be nationalised but the government did not want to do that. Nationalising the banks will result in shareholders, especially the Sovereign Wealth Funds who invested billions, losing their investments. But with the current market capitalisation of Citigroup and BoA combined at less than 30 billion, there is really very little left of the investments.

So, if you have not been very disciplined, you are not the only one. But its not too late to start now!

Source: TheMidnightStar

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