In this commandment of disciplined trading, the author means that it is not helpful and useful to try to get the money back from a bad investment and losing trade by bending one’s own rules of trading. The author also believe that this would only cause further loss to happen in the process. The reason is simple. The author argues that sticking to the rules and becoming a disciplined investor is the only way that can help the investor achieve the better performance in the long term. Instead, trying to get the money back from the losing trade would only result in higher losses for the investor. The reason is that the investor in such condition would have a higher chance of getting involved in trading and deals that are not rational and therefore making mistakes in the investment decision process is more probable (Cramer, 2005).
I firmly believe this is correct. I think that investing in the stock market always requires the investor to keep a clear mind and know what he is doing all the time. This means the investor has to be with a cold mind and rational all the time in the investment process. Ordinary people would usually become rather upset if they encounter a certain loss in the investment process that is beyond their acceptable level. As a result, they are more likely to feel the urge to get that money back by doing other extra investment, which they would not have done had they not encountered the losing trade. Therefore, the purpose to get the money back is actually the true motive behind such investment decision making. This is not a right motive for the investment that is going to be made as it would not have happened had the investor not lost money in previous transactions and investment in the market. In such a circumstance, it is highly likely that the investor might be irrational and with major fluctuation in his emotions. As a result, he would make hasty decisions without fulling considering and measuring the returns and effect of the investment decision as he normally would. This would apparently cause huge problems for the investor.
I personally invested in the stock market and feel that this commandment is highly useful in order to reduce the loss that would happen in the investment process. For example, I sometimes would also try to invest more money in extra assets when I have just encountered a major loss in my account. I consider this is not bearable and I have to do something, whatever it is, to avoid this from happening. One simple choice is to do extra trading of stocks so that I feel I have done something as remedies for the previous loss. The fact is this seldom helps me to avoid the losses that have already happened. From the author’s view, it is best for the investor to forget the losses that have just taken place.
This, I believed, can also be explained by the sunken cost concept in economic theories (Brooks, 2015, Elton et al., 2009). I recognize that the loss in the previous trading process is nothing but a sunken cost that could not have been retrieved no matter what I would do. However, I would still make the current trading count in order to make future profits in the coming investment decision making process.
This happened more often as I started trading stocks in the stock market about three years ago. Now I am a much more experienced investor in the market with a much more stable ability to make profit, as I later developed more experience in controlling my feelings and urge to ‘recover the loss’ from a previous transaction. I recognize that this is usually not possible as the past is not retrievable whatever I choose to do in the future. In such circumstances, the best thing that I actually would be able to do is to prevent the previous loss to negatively impact my future investment decision making.
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