Brexit is the withdrawal of the United Kingdom (UK) from the European Union (EU). Following a referendum held on 23 June 2016 in which 51.9 per cent of those voting supported leaving the EU. (Source: Wikipedia)
Now, nearly 3 years later the GBPUSD is still remains ~14.7% below the price before the referendum. I would like to use this example to stress the point of having an exit strategy when your trade does not go the way you want it to happen.
I have met various traders with these following remarks(mindset):
“I am not afraid, it if drops further, I will buy more”
“Don’t worry, the price will come back up again”
By being overly stubborn on your trades (example here on GBPUSD), your trading capital would have been tied up for the entire 3 years and you would still be holding on to the losses. Not to mention the interest/swaps that you have to pay.
Also, you have to think of the opportunity cost of holding on to this trade. The capital held up could have been better used for some other trades with a higher winning probability.
Looking at something nearer to home, the stock counter HYFLUX, once a market darling in the Singapore Stock Exchange, has been on a free fall since the 2010.
Traders & investors would have been in real trouble if you kept on accumulating this stock as it fell. Today we are at $0.21, less than 10% of its value during the heydays of this counter. Many who owns this would probably have written of this investment.
Just sharing my trading definition with everyone:
Conviction is the level of certainty I have that the trade will go in my way. A trade with higher conviction, I would personally consider taking a larger position to reap a larger profit. However, however convicted I am with the trade, I will always have a safety net. Once price is showing me that I am wrong, I will automatically exit the trade.
Note: Always make sure that the exit mechanism will kick in automatically. Reason being if you leave it to a manual decision to exit, then emotions will kick in. Hope, fear, panic will set in and your decisions will not be rationale anymore. Usually the outcome is more detrimental.
Stubbornness in my trades are usually avoided. I would have already evaluated the stop loss that I will tolerate (usually during my analysis when I am calm and composed). Once the trade hits those levels, the system will automatically kick me out of the trade, protecting myself from further losses.