“Commentary now published on Toyo Keizai ONLINE” Reasons losses are increasing

Good morning, this is Matsushita.

In the article from the day before yesterday,

I explained one of the representative worries of many investors,

the reason why profits are small.

In contrast to this worry,

the worry of “losses becoming larger” exists,

and I will explain its reason.

The reason is

1. Not pre-determining a stop-loss

2. Not understanding the nature of price movement (trends)

these two things.

Regarding 1, many investors

do not set a stop-loss point before trading.

A stop-loss is the act of realizing a loss,

so no one wants to lose, and they think it will be all right somehow

with a casual mindset, or they do not at all imagine that they could incur a loss.

However, in reality, they do incur a loss.

As many people imagine,

the price will either rise or fall in the next moment,

so you can consider there to be a 50% chance of losing.

It's not that simple in practice, but

anyway, it is inevitable that everyone will incur losses.

Unless you decide a point to realize losses in advance,

when a loss occurs,

you think, “I’ll try a bit longer.

Maybe the price will come back.”

In other words, you leave the loss as is.

If you are lucky and the price rises afterward,

and returns to your purchase price, that would be fine, but

if the price continues to drop, you end up with a “dangling stock.”

After this, problem 2 begins to rear its head.

Price movement has certain characteristics,

and the representative one is the trend.

By my definition, a trend is

“a large price movement that biases in one direction and lasts a long time.”

In the above example, after you bought, if the price drops and a “dangling stock” is formed,

a downtrend may be forming.

If that happens, your expectation that the stock will rise becomes very difficult.

Because trends tend to lean in one direction and continue for a long time.

If investors do not know about stop-loss points and do not know about trends,

and end up leaving a bought stock to stagnate,

and it rides a downtrend,

the unrealized loss grows day by day,

and when financially and mentally you can’t endure it anymore,

driven by the sole desire to escape that suffering,

you exit by closing the position.

Thus, losses become larger.

Here too, there is a simple lack of understanding of knowledge and theory.

Both profits being small and losses being large

can be prevented by expanding knowledge and theory and applying it steadily.

In doing so, you can limit losses and greatly widen profits,

and investors can become successful.

This is why I say that investing can win theoretically.

If you are troubled by small profits and large losses,

study and overcome the reasons for it.

If you do so, you will move from being part of the 80% loser's bracket in the market to the 20% winner's bracket.