A bag holder in regards to trading is someone who holds onto a position when it goes against them for an extended period of time causing large losses.
This typically happens when a trader enters a position and it goes quickly against them and they freeze like a deer in headlights. When this happens, beginner traders will likely hang 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.
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.
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.
Learn to cut your losses, but most of all have a plan before you go in to each trade. Know where you want to exit if you happened to call it wrong. We as traders can’t be right every time. So knowing where you are going to cut your losses is critical in not getting caught in stocks longer than you want to be. With an event like earnings coming up, you can compare that to gambling. There is really no telling what is going to happen to the stock price.
So don’t be a bag holder. Place stops and follow your risk management plan.