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I had a chat with a colleague who started trading recently where we shared our experiences and trades. His trading has been going very well – and by that I mean he’s been making money (many multiples of his starting capital).

A few weeks ago, he found himself in a losing position, and he said something that reminded me of myself some years ago: “I can’t take that loss. I’m going to wait for it to come back to break even, then I’ll get out”. He then did the second worst thing by adding to the losing position he couldn’t get out of, to “reduce” the cost price.

Over the weeks, as the trade continued to be underwater, he kept saying “Man, I just HOPE it comes back so I can get out even”.  As I’m writing this it seems likely to happen.

However, the problem here is that it teaches the mind to hang onto losses hoping they come back.

As a trader, once you’re in the realm of hope and no longer trading on precedence, you’re in trouble. Trying to be right and closing the position that proves you were wrong can impact your mental well-being as well.

Probabilities are not certainties

This is a very common phenomenon amongst traders, especially ones who’re starting out. First you don’t take the loss when its small because you’re confident in your thesis going into the trade, otherwise you wouldn’t have taken the trade in the first place.

Next, you can’t take the loss because it’s too big, but you’re HOPING it comes back. The last phase? You’re paralyzed into inaction.

Trading is not game of right and wrong. It’s a game of betting on probable outcomes, not certainty.

When you trade you want to eliminate the big losses. Hanging onto losses in hopes that they will reverse almost always guarantees that you’ll have catastrophic losses at some point. And the big losses hit more than the pocket book. It impacts your mental capital as well.

When you find yourself uttering words of hope in your trade, my advice is cut the position, no matter how big the loss is at that stage. Your mind will process the situation better from the side lines.

Traders share a peculiar characteristic: they’re fiercely competitive, but only with themselves. In practice this means that they see every outcome as an opportunity to learn, and they’re brutally honest about both their failures and successes. This also means that they’re hungry for knowledge. They don’t sleep easy with unanswered questions. And they’re seldom satisfied with just one answer.

Njabulo Nsibande is a founder of Village Trader, and Sakha Ingcebo investment club. His interest in trading began in 2016, alongside a rash of Instagram ‘fx traders’…

Find him on Twitter: @njabulo_goje.