Making capital on the markets needs the investor to forecast the course of the market and to make trades that eventually produce profits. Because of this, many day traders build a way of thinking that most trades have to be right. That is simply not right.
We’ve heard about stop loss, watched videos, and even witnessed paper losses on demo accounts. Yet then they didn’t injure us. You can warn a child not to get close to a hot oven, but will they really know before getting burned?
My point of view is that the most important thing to hammer into one’s brain is “stop loss, stop loss, stop loss”. No matter whether investing or trading, one wants a stop loss. I always note that when I started out, I had 20 good trades in a row (seriously, not a single loss!). I thought I’d found the key to printing money, so to say, and that I will never lose (a no brainer in a bull market). When all five of my trades started going against me (all longs, another mistake) I was too late to understand how wrong I was. I was hoping that things would turn out to be good (it had before) and I did not cut my losses short (another serious mistake).
Beware of just how easily the economy might lose momentum and be able to cut your losses and look for other opportunities! As much as we keep reading, this is perhaps the most frequently broken rule. Some trading coaches and seasoned traders say that we should keep our losses to a minimum while making money. In the absence of this, the possibility of risk rises and, as traders, our first priority is to protect our capital. We don’t have anything to deal with without a trading pot base. And, when a trade goes against us, we should be quick to cut losses on a controlled basis.
When you find it difficult to acknowledge the fact that you might have been mistaken in a trade, you may find it harder to close out losing positions. Instead, you decide to persuade yourself that you might already be proved right and that exchange will turn around and become profitable. There is a possibility that subconsciously, you will only consider data that confirms where you want the stock price to go, dismissing information that shows you are incorrect. When you understand that you’re not going to get every trade right and that you don’t really need to be right every time, mentally speaking, you’ll be much better placed to handle your company efficiently.
Get out of losing positions quickly
A common trait of active stock market traders is their ability to get out of losing positions easily and without delay. In the popular book Reminiscences of a Stock Operator, Jesse Livermore (which most people in the industry find to be one of the greatest traders of all time) lived by this law. All too much, newbies are reluctant to switch their stop rates in fear of getting out of the competition at a small or high level. This is about investor psychology; traders can be willing to cash their gains early and take their losses late. A way to prevent that will be by setting pre-determined goals in place before opening up their trade and sticking to those goals.
Sell and move on
Do you have any other investment strategies in which to place the money you’re sure of? If yes, please don’t hesitate to sell and move on. There is no harm in having a loss from time to time. Markets are shifting, and even the most professional traders are going to get things wrong – in most cases very frequently. What looked good in the past may not look good in the future, so a good trader must be continuously on the lookout. If you have several stocks in your fund, use the losses to commence one that you have profit on and that you are also done with. Balance the capital profits back wherever possible. I’m doing a lot of souls searching in early December.
I think that one of the most critical facets of trading is psychology, are your trades planned? You need to schedule a trade, then trade a plan… Let’s take the case of a stock that dropped by 20%. Many novice creditors are hoping for a bounce-back rather than a blow and a bailout. Yet this is undoubtedly an error due to a sentimental connection to a business or narrative that has no room in the dog-eat-dog realm of speculation.
Every single trader has his own fair share of losers. That’s part of the game, but what I like to think about is the 80/20 rule. That 80 percent of my profits come from 20 percent of my trades. For example, when I did my fx trading in March, I suffered more losses than normal, but my account is still up. It’s because we’re in a big market, and my winners were the variety of 20-40 pip, instead of being able to run a couple of 100 pip plus winners.
Use a stop loss and be disciplined
Therefore, when trading CFDs, the use of stop losses cannot be highlighted enough, so most CFD vendors can provide a variety of various order forms to better control trading positions. Often use a stop loss and be vigilant if the market is above your exit point. Always use the real stop loss, because ‘mental breaks’ do not work. Losing more than 10% of trading could be of little importance with actual shareholdings, but the customized nature of CFDs ensures that this may result in a much greater loss and be especially detrimental to a trader’s collateral.
Never average down a losing position. If the position turns against you, get out of here and cut your losses. Hope is a four-letter word when it comes to trading. Holding on a trade loss will also result in opportunity costs because the money stays bound to a trade loss and better prospects are lost.
Never trade on hope
Never depend on expectations. Think about how much you’re prepared to lose. Place your loss stop and hold on to it, instead of pushing your loss stop farther away in the expectation that the price will rebound. Another of the most frequent errors is that the market moves against your bets and that you fail to accept the loss (regardless of how small; the ego plays here).
It’s like a short-term trade becomes a long-term bet, it’s like using charts because it’s the failure of the chart, or using trading mechanisms so you can accuse them. As a result, the loss rises, and the loss becomes much more difficult to gulp, and the trade appears to fail to consider it. This fight continues until the loss is so daunting that the trader has no choice but to eventually accept the loss. The trouble with this is that a trader who losses 50 percent of his initial money would have to make a return of 100 percent just to split up. So, if your target is to make a return of 20% a year, it’s going to be difficult. Position hard stops right after joining the CFD exchange. Stops should only be pushed up to lock in gains, never down.
Trade exit point
Using limit orders helps you to immediately exit a transaction at a set price, while a stop loss order covers the downside. Naturally, it is always a smart idea to shift stop losses as the market swings in your favour to lock in profits or use trailing stop losses to lock in profits. Note that stop loss requests are not guaranteed, because often markets or share gap overnight, which means that there is an environment in which the order can not be executed. In this situation, trades are made at the first available market price, so that the possibility of expected stoppages can be minimized. They ensure that you are stopped at your preferred point no matter what happens. However, a larger spread can be charged by the broker for this security.
Don’t just presume that your trade exit point would be exactly where you put your stop loss position. It is important to note that a stop loss order merely establishes a starting point for the execution of an order. In different degrees, ‘gapping’ or ‘slipping’ is normal in all capital markets. If the sell stop has been put in a long spot, the stop loss will be triggered if the price trades at or below the designated stop point. From time to time, this may result in trades being executed at a price that is less attractive than the designated stop loss price. It’s classified as slippage. In fact, this ensures that your stop loss will be sold at a cheaper price than you anticipated, which can cost you more – depending on the demand, sometimes – particularly for volatile markets such as commodities.
The risk profile of each CFD trader is distinct as the risk profile of other shares. Generally, the more gambling the stock, the higher the risk. As such, some CFD traders with a more extreme risk profile will find higher risk trading strategies and assured stops to limit their downside risk.
You can try to hold overall drawdowns between 20% and 25%. If the drawdowns reach this stage, it is extremely difficult, if not impossible, to recover entirely.
Be able to stop trading and re-assess stocks and your approach as you face a sequence of losses. Once the inevitable depressive slump hits and the financial exchange appears to be conniving against you, it’s usually best to back away and take a break from trading. Come back and stick to your trading strategy. The reality is that losing trades is not avoidable.
And last but not least, you can only trade with capital that you can afford to lose.