Regardless of what type of trading context you are considering, losing is just another part of any form of financial trading. Every trader has a bad day regardless of how skilful they are. In fact, the best any person can hope for is a 60/40 ratio in the wins and losses a trader can experience in the market. As losing is something that cannot be avoided the best any trader can do is to be prepared for these loses and have strategies to manage their trades that they are about to lose.
Key points:
- Traders don’t need to put all their focus into their win/loss ratio, as you can lose more trades than you win and still be a successful trader
- Always treat losses as a learning experience
- There are a number of ways you can use trading losses to improve your trading like implementing stop loss orders, analysing each loss, and using a trading journal
- Trading can be exciting and even profitable if you are able to stay focused, do due diligence, and keep emotions at bay.
- Still, the best traders need to incorporate risk management practices to prevent losses from getting out of control.
- Having a strategic and objective approach to cutting losses through stop orders, profit taking, and protective puts is a smart way to stay in the game.
Potential Issues in Manage Losing Trades
Before going deep into how to manage losing trades, it is important to understand some of the common mistakes traders make which lead them to losing their trades. One of the greatest among those mistakes is a loss of trading discipline. Whenever an investor allows emotions to affect their decision making capacity, they lose the trading discipline. This could include anything between greed, fear, frustration or anything else that can hinder the trader’s capacity of decision making.
The next issue that could lead to a losing trade is a faulty trading plan. It is always very important to make sure that you are working with a well-documented plan that accounts for risk management and specifies good estimates on the return on investment. This in itself can help avoid most of the trading pitfalls in any scenario. However, regardless of how much you plan, the markets are always unpredictable. As a result, it is very important to adapt and modify your trading plans according to the situation. Similarly, some other factors that can lead to losing trades include poor risk and money management, having unrealistic expectations from the market and so on.
Averaging Method for Losses
Averaging is one of method many traders use to manage their trading losses effectively. In this, the trader is adding money to a position after the market has started moving in the opposite direction. While this strategy has the advantage of helping improve your average price, there are some issues that need to be addressed first before using this strategy. There is always a fact that the market’s momentum is always against you when you are using the averaging down strategy. This only means that you would be essentially adding to a losing trade and this practice can be very bad for your trading account if you fail to assess the market’s momentum accurately.
It is also quite possible to easily understand when a trader is averaging down for wrong reasons. All you need to do is check for the validity of the rationale behind the trade. If you find that the rationale is invalid, there is no reason for you to be involved in the trade. If the rationale for the trade is invalid and if you are continuing to average down, you are getting involved in the trade for wrong reasons and hoping that the prices will move towards the target you desire. This is an approach that should be avoided at all costs in trading.
Managing the Leverage
The next most useful method most investors use to manage losing trades is by using leverage. This provides the traders with an additional opportunity to improve their returns. However, you need to know that leverage can at times be like a double edged sword that could amplify the downside as much as it can boost your gains. The markets usually allow the traders to leverage as much as 400:1, giving them a chance for massive gains while at the same time crippling losses too. Even though the markets allow the traders to invest in massive amounts of financial risks, it is generally advisable to limit the amount of leverage used.
Most of the traders generally use a leverage of 2:1. The amount of the leverage that is available comes from the margin that each broker is required to place for each trade. The reason why a trader may fail in this scenario is because of being under-capitalized in comparison with the trades that they may have placed. Leverage not only magnifies losses but can also increase the transaction cost and these costs continue to increase as the value of the account drop.
What Is Active Trading?
Active trading means regularly attempting to take advantage of short-term price fluctuations. You’re not buying stocks for retirement. The goal is to hold them for a limited amount of time and try to profit from the trend. Active traders are named as such because are frequently in and out of the market.
What Are the Risk Management Techniques Used by Active Traders?
Techniques that active traders use to manage risk include finding the right broker, thinking before acting, setting stop-loss and take-profit points, spreading bets, diversifying, and hedging.
What Is the 1% Rule in Trading?
The 1% rule demands that traders never risk more than 1% of their total account value on a single trade. In a $10,000 account, that doesn’t mean you can only invest $100. It means you shouldn’t lose more than $100 on a single trade.
How Do I Become a Successful Active Trader?
To become a successful active trader you must understand financial markets and be familiar with the various tools used to read price movements. You must also have sufficient capital and time to trade and be capable of keeping your emotions in check. The key is having a strategy and sticking to it. And, if you want to be successful over the long term, spreading out your bets.
Active trading isn’t for everyone. Despite what you may hear, it isn’t easy and guaranteed to generate enough money for you to quit your day job. Think carefully, start small, and try simulating some trades on a test account before putting your money on the line.
The Bottom Line
Traders should always know when they plan to enter or exit a trade before they execute. By using stop losses effectively, a trader can minimize not only losses but also the number of times a trade is exited needlessly. In conclusion, make your battle plan ahead of time and keep a journal of your wins and losses.
