If you are a novice trader and are losing over $10,000 in a matter of days, don’t get discouraged. Instead, identify your mistakes and refine your strategy
Make sure that you are using a proper risk/reward ratio, implementing a 2% rule, maintaining a positive expectancy, and testing as often as possible to avoid these losses and generate profits.
Implement a Risk/Reward Ratio
Don’t trade unless potential earnings are at least 3x greater than losses. Most traders use a 1:3 ratio or lower to maximize profits on successful trades and minimize losses on failures.
Trading with a strategic risk/reward ratio allows you to lose the majority of the time while remaining profitable. It also prevents you from taking on damaging losses over a short period.
Set a 2% Rule
The majority of successful traders never risk more than 2% of their capital at once.
Add a 2% rule to your risk management policy to keep any short-term losses modest, and you shouldn’t have to worry about losing thousands of dollars each week.
Maintain a Positive Expectancy
If you want to avoid enormous losses and become a profitable trader, you must sustain a positive expectancy.
Expectancy is how much you net from a single trade on average. Consider refining your strategy and risk management policy to ensure this number stays positive over time.
Also, before committing to a trade idea, make sure that it has its own positive expectancy. Do not trade unless your testing indicates that it will likely generate profits.
Calculate expectancy to see how reliable your system is.
Test Every Idea
Backtest and paper trade every single idea. This will indicate whether a trade is worthwhile and prevent you from incurring avoidable losses.
Also, testing with a demo will give you valuable trading practice to advance your abilities without risking any money.
If you refuse to test your trades, the likelihood of consistently collecting profits and improving your skillset is slim to none.
Don’t give up if you are losing thousands in under a week. Learn from your mistakes and refine your strategy. Consider these essential rules to shrink losses and become a profitable trader.