Source: Indrazith Shantaraj
Only two people never lose in trading – 1) God and 2) Liar.
It is quite often said that there are two certainties in life: death and taxes.
We would add a third to that list ‘losses in trading.’
Everyone who has ever traded experiences losses at some point. The key is to learn how to manage those losses, so they don’t take a large bite out of your account balance and derail your trading career.
I am a full-time trader and have realized losses are part and parcel of this game.
“The only trick to success in trading is to lose less money when we are wrong and make more money when we are right. “
In this way, you make profits even if you get 50% accuracy in trading.
There are several things you can do to keep losses small and manageable. Let’s take a look at a few of them.
1 – Use Trading Setups which give the Highest Conviction
Follow one trading system and get a high conviction in that system. If you’re new to trading or haven’t had much success thus far, it might be tempting to try out different techniques or strategies.
However, this can often lead to more losses than gains. It’s crucial to find one system that works for you and stick with it. Get comfortable with the potential losses and profits of the system and have faith in it before executing trades.
2 – Use stop-loss orders
A stop-loss order is a simple automatic order placed with your broker to sell your holdings when it reaches a specific price. This limits your losses on a trade if the market moves against you.
For example, let’s say you buy shares of Company XYZ at $100 per share. You could place a stop-loss order at $95 per share. If the stock price falls to $95, your broker will automatically sell the shares, and you will restrict your loss on the trade to $5 per share.
3. Cut your losses quickly (don’t average down)
It’s hard to do, but one of the most important things you can do as a trader is to cut your losses quickly when a trade goes against you. Don’t let emotions get in the way, and don’t try to “average down” by buying more of the security at a lower price in the hopes that it will rebound.
If you do find yourself in a losing trade, the best thing you can do is get out quickly and move on to the next trade. There will always be other opportunities.
4. Take profits when they’re available
It can be highly tempting to hold on to a winning trade in the hope that it will continue to move in your favor and make an even bigger profit. But this is often a recipe for disaster. The market can turn on a dime, and your profits can quickly turn into losses.
Taking profits when available is important, and not letting your ego get in the way. A good rule of thumb is to book profits for some portion when they’re at least equal to your initial risk on the trade.
So, if you bought shares of Company XYZ at $100 per share and placed a stop-loss order at $95 per share, you could take profits for a 50% position when the stock price reaches $105 per share. For the remaining 50% position, you can use $100 as the stop-loss.
That would give you a 5% profit for a 50% position on the trade, and it would be much better than holding on and losing money if the stock price declines.
5 – Never ever fight with the market (no revenge trading)
The most important thing to remember if you want not to lose money in trading is to avoid fighting with the markets. This means no revenge trading!
Trading is all about probabilities; when you’re trying to pick tops and bottoms, you’re essentially playing a game of chance.
The key is to remember that the market can stay irrational longer than you can stay solvent.
Just because you see a potential top or bottom doesn’t mean you have to trade it. Instead, focus on finding setups with a higher probability of success and let the market do its thing. Over time, this will help keep your losses small and your wins big.
6 – Manage your risk (money management rules)
Last but not least, one of the best things you can do to keep losses small is to manage your risk properly. This means only risking a small percentage of your account balance on each trade. For example, if you have a $10,000 account, you might only risk $100 or $200 per trade. That may seem small, but if you make 10% or 20% profits on your winning trades, you can quickly build up your account balance.
These are just a few things you can do to keep losses small and manageable. The key is to have a plan for managing risk before you even enter a trade. That way, you’ll be prepared if the market moves against you, and you’ll be able to take quick action to limit your losses.