Trading Psychology in 60 seconds – The Disposition effect

In the book Reminiscences of a Stock Operator, Larry Livingston, our hero of the story, did what we know as a result of that when he held on to his position in the cotton that showed him the loss, 

but he sold his position of wheat which showed him profit. He came to the conclusion that this was the worst mistake anyone could ever imagine.

Consider shareholders in the ABC stock code - down 25% per day. How many of them will continue to hold? 

It is a difficult call to ask anyone to sell a position that reflects such a loss. Most catchers will be dealing with a huge loss because this item was $ 4.40 12 months ago.

Now, what can you do?

First, you make yourself aware of the consequences of the situation, and with this in mind set up investment or trading rules that are directly related to preventing you from getting into that predicament.

We do this by not buying ourselves too much. We focus on the economic foundations not only of the company but also of the wider economy we find ourselves in. In the world of COVID 19, 

this could mean that many people will be clinging to traffic-related stocks and suffering the same outcome - clinging to Webjet's in their portfolio, but loading their own ZIP or Afterpay shares that show a profit.

You can take small sizes of positions as a general rule and point out the worst-case scenario and see when this situation happens, the impact it can have on your overall portfolio.

You probably limit yourself to just one stock per sector, such as one construction company or one bank, and so on, because we often see how bad news is affecting one bank, always leading to deviations from other banks. 

But we are not your financial advisor. We do not know what is best for you. But we suggest that making the mistake of guessing the worst that anyone could ever do in the marketer writing Articles, would be one mistake you should avoid.