The Right Way to Approach Trading Losses

To experienced investors, trading losses are annoying. To new investors, trading losses can be devastating—and may be enough reason to stray from trading altogether. Trading stocks is always …

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To experienced investors, trading losses are annoying. To new investors, trading losses can be devastating—and may be enough reason to stray from trading altogether. Trading stocks is always a risk, no matter what formulas you’re using or how much experience you have. Still, it stings when you experience a loss on a trade you thought was going to pay off.

Most investors see trade losses as an indication that you’re doing something wrong. They’re something to be upset about, or even embarrassed about, and are definitely a bad thing for your future portfolio.

But in reality, trades can be a good thing—and may even be an indication that you’re doing something right.

Types of Trading Losses

First, understand that there are many different types of trading losses, and not all of them should sting the same way:

  • Temporary losses. Just because an asset lost value doesn’t mean it’s worthless. Stock prices ebb and flow over time, especially for big companies. If you’re a long-term investor, consider the advantages of holding onto your assets, rather than selling them off and taking the loss. This could just be the result of a temporary fluctuation.
  • Losses that result inevitably with a consistent strategy. If you’re following a consistent buying and selling strategy, you’re inevitably going to experience losses. Why? Because any good strategy incorporates some degree of risk, and if you take a similar risk enough times, there will be instances where the risk doesn’t pay off or works against you. Adhering to your long-term risk-taking strategy, eventually, you’ll see more gains than losses, but those individual losses are unavoidable.
  • Losses due to missed information. The hardest losses to take are the ones that resulted because you missed some key piece of information, or because you neglected some factor in your decision-making. For example, you might have overestimated the importance of a new piece of technology, or you might have only heard half the story about a new pharmaceutical development. These are the only types of losses that are truly “your fault,” but they do present valuable learning opportunities.
  • Losses due to unexpected fluctuations. Sometimes, you’ll take a loss for no other reason than sheer luck. A company might get unexpectedly bad news, or a significant natural disaster might tank the international economy. Accidents, sudden market shifts, and controversies all have the power to take a good stock and drive it into the ground, and there isn’t much you can do to avoid them.

Even the most extreme losses—the ones that resulted because you made a bad decision or missed a key piece of information—aren’t that bad. They don’t mean that you’re a lousy investor, and even if they wipe out a chunk of your portfolio, there’s always time to recover. Try to take your loss in stride.

The Benefits of a Loss

It also helps to realize some of the “hidden” benefits of losses:

  • Tax benefits. If you sell your equity and realize a significant loss, remember that your capital losses are tax deductible through Form 8949 and Schedule D. If you’ve made significant capital gains in the same period, your capital losses will cancel out that income, and you’ll only be responsible for paying taxes on the capital gains above and beyond those losses. You can recover a significant percentage of your loss in some cases, and even carry your loss forward to other tax years.
  • Buying opportunities. Taking a loss means the price of your chosen asset dropped significantly. But that also means an asset you thought was valuable is now trading at record-low prices. To the savvy investor, that represents a buying opportunity. Assuming the company is still in solid shape, you can buy up more shares in the hopes that they return to their original value; such a move could cancel out your loss entirely, or even leave you with more profits.
  • Learning opportunities. Everybody makes mistakes, especially when they’re new to the world of trading. The difference between successful investors and unsuccessful investors isn’t in how many mistakes they made, but in how they learned from those mistakes. If you lost money on a trade, work to understand the root causes; did you buy when the stock was overpriced? Did you neglect a key competitor? Did you avoid selling for too long? Use that knowledge to make the rest of your trading decisions even better.

Trade losses aren’t going to feel good, no matter how much you sugar-coat them, but try to see them for what they are. At best, they’re an inevitable part of your strategy and a strong buying opportunity, and at worst, they’re a good

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