Handling stock losses is very hard to do, watching a stock falls from green to red is a nightmare for both stock investor and trader.
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Now, if you are an investor this is a very good deal to buy more shares given that the company is fundamentally wise. However, if you are a trader, you need to swallow the fact that you need to bail out on a losing position. This kind of situation is easier said than done, having to cut your losses @ 50% is really painful.
The main issue here is the lack of Risk Management. Every trade or investment that is to be made must have an accompanied plan. The “Plan” here is basically setting an amount that you are willing to lose, an amount that you are willing to let go but will still enable you to sleep soundly at night.
In this article, we will be tackling how hard it is to recover from a losing position than to cut your losses. This is done by computing the Break-Even Point.
The Formula
- Y = X/(1-X)
Where
- Y is the needed % gain in order to break-even
- X is the % loss (to be converted into decimal)
Example
Your current loss is at 80%. 80% converted to decimal is 0.8.
Y = 0.8 / (1 – 0.8)
Y = 0.8 / (0.2)
Y = 0.8/0.2
Y = 4 (which will be converted to percent)
Y = 400%
The 400% gain figure is very hard or near impossible to achieve without allocating so much time. In this kind of situation, it is much better to cut your losses and use the funds to enter a more profitable position. I am not discounting the possibility of a bounce but let us also be realistic of what percent is possible.
So next time you check your losing portfolio, use this formula to know of how much gain do you need to break-even. Then contemplate whether to cut or hold to your losses.
Read this article “Warning: You're Losing Money by Not Knowing the Break Even Point Formula” if you want a quick glance of the Loss/Gain percentage table.
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- Your Life In Perspective by Ælfræd "Elf Counsel"
