In the world of stocks and investment, people often become overly obsessed with making profits. However, trading also involves the possibility of incurring losses.
In fact, it is during this phase that a trader’s mental toughness is truly tested. Given that it’s possible to be profitable today and experience losses another day, one must be like a resilient boxer: strong in delivering punches and strong when taking them.
So, what should you do if you keep experiencing losses?
It's important to note that the stock market is a flexible field. There are both profits and losses involved. Once you identify potential risks of loss, your chances of achieving profits become much broader.
In this post, we'll specifically discuss how to minimize losses while trading or investing in stocks. These methods are not the only ways to reduce deficits but are shared based on personal experience. Here are some tips for investing in stocks:
1. Avoid Acting Impulsively
This issue is commonly experienced by novice traders. Despite attending numerous training sessions and seminars, the results in practice can often be quite different. The immediate reaction to try and quickly recover from losses can lead to mistakes.
Trading is not a “friendly” world. Don’t expect anyone to give you money for free when you’re down. There are many variables that can cause losses or gains. It’s better to study and analyze why you experienced losses rather than taking high risks impulsively.
2. Adjust Your Stock Portfolio Composition
It’s safer for traders to prioritize liquid stocks. Liquid stocks are stable, widely traded, and well-established. They are generally less risky than illiquid stocks because you avoid significant potential losses.
A safe portfolio composition is 100:0, with all funds in liquid stocks. This composition is safe for beginners because almost all chosen stocks are liquid. This helps minimize the probability of loss.
As you gain experience, consider adjusting your portfolio to 90:10 or 80:20, including some illiquid stocks to practice your investing intuition. If managed well, illiquid stocks can still be profitable.
Liquid and illiquid stocks are usually apparent during trading hours, clearly visible on the stock trading curve. Liquid stocks tend to attract more investors compared to illiquid ones due to various factors.
3. Use Small Capital for Trading
There’s a common belief that larger capital leads to greater profits, which seems to be a doctrine for traders. While this can be true for experienced traders, it can be a double-edged sword for beginners.
If you are a novice with substantial capital, manage your psychological approach carefully to avoid poor decisions. Always monitor trading indicators, stock values, and historical data to avoid major losses.
To prevent large losses, start with small capital, such as under 5 million IDR. Screen the stocks you want to buy and practice making decisions on when to buy and sell. As you gain experience and start making profits, you can gradually increase your investment.
4. Prioritize Selected Stocks
As your experience grows, you'll become better at identifying stocks. Some liquid stocks may have high risks, especially in sectors like life insurance. On the other hand, some illiquid or “penny” stocks may consistently provide profits.
In other words, you’ll be able to identify when a stock is likely to rise or fall and recognize the characteristics of stock values. Develop your play style and invest in stocks you know well. Avoid buying speculative stocks or "penny" stocks unless you are comfortable with the associated risks.
5. Create a Trading Schedule
Whether this impacts you directly or not, it’s worth trying. For part-time traders or those who view trading as a side business, choose times when you can make decisions calmly. Avoid trading during work breaks as it can affect decision-making.
For full-time traders, establish a comfortable trading schedule that suits your needs.
6. Don’t Hesitate to Cut Losses
To prevent trading mistakes from severely impacting your finances, make timely decisions to cut losses. Even professional traders make mistakes but usually act quickly to cut losses.
Treat a poor trading session as a chance to reset and recover mentally for the next day.
7. Avoid Overtrading
While enthusiasm for trading is good, it should be balanced with good psychological management. Limit the number of positions you open at any one time to 3-6 to avoid emotional upheaval from sudden market changes.
These strategies will help you minimize excessive losses in trading. While these tips may not guarantee huge profits, they can help you avoid significant losses and improve your trading experience.