Bag Holder: Someone who holds onto a position when it goes against them for an extended period of time, causing extremely large and unnecessary losses.
This happens when a trader enters a position and it goes quickly against them and they freeze because they didn’t plan for the potential loss before they got into the trade. When this happens, traders will likely hold on to their position in hopes of it coming back, however, what usually happens is the stock keeps going against their position and they lose even more money. Remember, “Hold and hope” is not a strategy!
There are a lot of reasons why traders will hold onto a losing position, but the main one is fear of losing. Nobody wants to be a loser. Not me, not you. It’s in our blood to want to be successful. So when trades go against us, we go against our better judgement and turn a losing trade into something much, much worse.
It is so easy to avoid becoming a bag holder as all you need to do is cut the loss quickly (which is exactly what I preach in this free trading workshop) however so many individuals who get into trading are not willing to accept the fact that they will only win around 60% of the time. As a result of this, none of them have a plan for what to do when the trade goes against them, which means that once the trade DOES go against them, they have no idea how to react.
This is the psychological aspect of trading that new traders tend to have a hard time with. They hope it will turn around and the moment they do this they are putting emotions before logic and reason.
#1 rule is to cut your losses quickly ALWAYS and be sure to have a plan in place before you trade so that you know exactly where you are getting in, taking profits, and cutting the loss!
Want to learn more of the most important rules of trading? Sign up for our free Trading Workshop! You’ll also get access to the Top 10 Trade Setups of 2019 [PDF]
