When trading, many people assume that they will always make a profit, or at the very least they won’t incur a loss. More often than not, traders go so far as to ignore the possibility of losing a trade. With this mindset, traders are focusing too much on how to win and not enough on how not to lose. It is here, in this mindset, that traders fail. Losing is an integral part of the game and one must become an expert in how to navigate this unpleasant terrain. Here are a few steps that will help guide you throughout the trading process.
If you don’t come in with the right mindset in trading, you are hindering yourself from becoming successful. One must understand that by trading you are taking a risk that your capital will sometimes decrease. Once you understand that losing out on a few positions is normal, and not detrimental, you will start to feel more comfortable losing. This will allow you to push forward, and hopefully turn the tables to become more successful.
Trade relative to what you have in the account – not what you started with
One cannot just take positions in the market and hope to make quick gains. You must have a strategy, and one that works for you. Now let’s say you found an exploitation in the market and start making money, how much do you keep investing? You should be investing the same amount, relative to what you were investing before.
Let’s look at an example. Say you were to take a position on 75% of your $1000 into a certain commodity, let’s say gold. Gold went up 5%, so now you have in total $1037.50. The next day, your position should be 75% of $1037.50, which is your new total. The same goes for losing. In order to minimize your losses, you should always be investing relative to what your strategy is. If you lost 5%, that would keep you at $962.50. You must reduce your position so that you will only be risking 75% of $962.50, which is $721.875. This strategy is crucial for when you start losing, because you don’t want to find yourself at a point where you wiped out too much of your account to make significant gains.
Step Back and Learn
Let’s say you’ve had a bad three days of trading and have lost 15% of your account, what do you do now? You might continue and believe that things will bounce back, but often times they don’t. Sometimes it’s just better to take a step back and relax. Understand the things you did wrong that led up to your losses. This is not to say that some days the market just doesn’t work in one’s favor, but odds are you are making some sort of mistake. Try to not jump right back into trading, try to find a new strategy that works for you, being that your old one has most likely expired. Remember- don’t give up and keep trying.
Losing is an integral part of the game. By becoming an expert in navigating this unpleasant terrain you will ultimately become a much better trader. The best thing to do is to focus on minimizing the amount you lose when you do face losses. This is a far better strategy than trying to never lose at all. When traders try to eliminate all losses, they are much more likely to have their account wiped out.