Technical and Mental Stops
Letting your losses get out of hand is a mistake that pretty much everyone, even the pros, make all the time. Think of it like driving a car without any brakes - a crash is just waiting to happen. In my opinion, if you can't deal with the idea of cutting your losses, then maybe managing your investments or anyone else's isn't for you.
People just hate the idea of taking a loss. But the sad part is, because of this, they end up with even bigger losses that really hurt their investments. It's kind of funny when you think about it - they're too proud to admit they've made a small mistake, and as a result, they end up making a much bigger one. That's a hard pill to swallow, but it's a part of investing.
So how does all this tie back to the concept of technical and mental stops? Well, let's dive in.
A technical stop is like setting rules for yourself before you dive into the investment game. It's making a plan based on what the numbers and past trends have shown you. For example, you might decide to sell if the price drops below a certain point, a so-called cutloss. It's like Bob deciding to break up with Sarah if she cheats - it's a predetermined rule, a line in the sand.
On the flip side, a mental stop is more about feeling out the situation and making decisions based on what's happening right now. It's like when the price drops by 15% and you take a step back to see if the company is just having a rough patch. Or like Bob introspecting and trying to figure out why Sarah cheated - maybe it was something he did or didn't do.
Each approach has its own pros and cons. A technical stop can help keep you disciplined and focused. It can also save you from the human tendency to justify our actions, known as confirmation bias. When the price drops, it's easy to find reasons not to sell. But with a technical stop in place, you're forced to cut your losses and move on, making you more objective in your future analysis.
A mental stop, on the other hand, offers flexibility. It allows you to evaluate the situation and make decisions based on current conditions. If the company is still strong and the price drop is just due to market fluctuations, you won't rush to sell at a loss. It gives room for price changes, but it requires a strong conviction and a deep understanding of the company's condition and the market environment.
The key takeaway here is that both types of stops can help you manage your losses, but only if you're willing to take them. If you're too stubborn to admit you've made a mistake, you'll end up losing even more, and that's a situation nobody wants to be in.
Here is table comparison of the two stops
This two kind of stop losses reminds me of some quotes that I read from Sun Tzu’s Art of war:
Sun Tzu once said, "He will win who knows when to fight and when not to fight." This is closely related to the concept of a technical stop. As an investor, knowing when to 'fight'—that is, when to hold onto your investments—and when to retreat, or sell them off, based on pre-set conditions or 'technical stops', can be the difference between profit and loss.
On the other hand, Sun Tzu also said, "If you know the enemy and know yourself, you need not fear the result of a hundred battles." This aligns with the idea of a mental stop. An investor must understand not just the company they're investing in (know the enemy), but also their own reactions and behaviors (know yourself). This understanding can help prevent hasty decisions made during market fluctuations, and guide more strategic and flexible decision-making.
Lastly, Sun Tzu's idea that "Opportunities multiply as they are seized" can be tied to the concept of both technical and mental stops. By being willing to cut losses when necessary, you are effectively seizing the opportunity to prevent further loss and to reallocate your resources to more promising investments. This decisiveness can create new possibilities and multiply your opportunities for success.
In essence, the wisdom of Sun Tzu's Art of War provides valuable guidance that can help navigate the often volatile landscape of investing, demonstrating the importance of both tactical decision-making, flexible strategy and of course risk management (stoploss)
People just hate the idea of taking a loss. But the sad part is, because of this, they end up with even bigger losses that really hurt their investments. It's kind of funny when you think about it - they're too proud to admit they've made a small mistake, and as a result, they end up making a much bigger one. That's a hard pill to swallow, but it's a part of investing.
So how does all this tie back to the concept of technical and mental stops? Well, let's dive in.
A technical stop is like setting rules for yourself before you dive into the investment game. It's making a plan based on what the numbers and past trends have shown you. For example, you might decide to sell if the price drops below a certain point, a so-called cutloss. It's like Bob deciding to break up with Sarah if she cheats - it's a predetermined rule, a line in the sand.
On the flip side, a mental stop is more about feeling out the situation and making decisions based on what's happening right now. It's like when the price drops by 15% and you take a step back to see if the company is just having a rough patch. Or like Bob introspecting and trying to figure out why Sarah cheated - maybe it was something he did or didn't do.
Each approach has its own pros and cons. A technical stop can help keep you disciplined and focused. It can also save you from the human tendency to justify our actions, known as confirmation bias. When the price drops, it's easy to find reasons not to sell. But with a technical stop in place, you're forced to cut your losses and move on, making you more objective in your future analysis.
A mental stop, on the other hand, offers flexibility. It allows you to evaluate the situation and make decisions based on current conditions. If the company is still strong and the price drop is just due to market fluctuations, you won't rush to sell at a loss. It gives room for price changes, but it requires a strong conviction and a deep understanding of the company's condition and the market environment.
The key takeaway here is that both types of stops can help you manage your losses, but only if you're willing to take them. If you're too stubborn to admit you've made a mistake, you'll end up losing even more, and that's a situation nobody wants to be in.
Here is table comparison of the two stops
This two kind of stop losses reminds me of some quotes that I read from Sun Tzu’s Art of war:
Sun Tzu once said, "He will win who knows when to fight and when not to fight." This is closely related to the concept of a technical stop. As an investor, knowing when to 'fight'—that is, when to hold onto your investments—and when to retreat, or sell them off, based on pre-set conditions or 'technical stops', can be the difference between profit and loss.
On the other hand, Sun Tzu also said, "If you know the enemy and know yourself, you need not fear the result of a hundred battles." This aligns with the idea of a mental stop. An investor must understand not just the company they're investing in (know the enemy), but also their own reactions and behaviors (know yourself). This understanding can help prevent hasty decisions made during market fluctuations, and guide more strategic and flexible decision-making.
Lastly, Sun Tzu's idea that "Opportunities multiply as they are seized" can be tied to the concept of both technical and mental stops. By being willing to cut losses when necessary, you are effectively seizing the opportunity to prevent further loss and to reallocate your resources to more promising investments. This decisiveness can create new possibilities and multiply your opportunities for success.
In essence, the wisdom of Sun Tzu's Art of War provides valuable guidance that can help navigate the often volatile landscape of investing, demonstrating the importance of both tactical decision-making, flexible strategy and of course risk management (stoploss)
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.