Let’s talk about how to deal with losses.
When trading, there will be losses, and I’m going to share with you how to deal with it.
There’s 3 things you need to know about losses.
1. Losses will happen.
They are part of trading. Yes, you will have winning trades and you will have losing trades.
This is very important to understand because as humans, we are not wired to accept that there will be losses. We think that this is failure and it means that we failed.
This is not the case. You will have winning trades and you will have losing trades. You have to be able to accept the fact that there will be losses.
Now how do you deal with them? Well, this is where the second thing you need to know about losses comes in…
2. You’ve got to keep them small.
My rule is: never risk more than 2% of your account on any given trade. If you have a $5,000 account, 2% would be $100.
If you have a $5,000 account, you should be okay losing $100 on a given trade. If not, trading is not for you.
One of the reasons why people, mainly traders struggle to deal with losses is because they let the losses become too big,
This is a challenge, of course. If you have a $5,000 account and you have one trade that makes you lose $2,000, you have a problem dealing with losses.
But if you keep your losses small, they are only 2% of your account. Think about it. You could have 5 losing trades in a row and you're still only down 10% on your account.
Let’s run the math. If you have a $5,000 account and you're risking $100 on any given trade - if you have 5 losing trades in a row, you're only down $500. You still have $4,500 and you should be OK with that
3. You need to find a way to make more money on your winning trades than you lose on your losing trades.
Typically this is done with a Trend Following Strategy. A Trend Following Strategy means that you're not trying to pick bottoms and tops.
It means you’re waiting for a trend. And then you use the momentum and this shall carry you forward. This how you can risk $100 and try to make $200.
When you do this, you’ll make more money on your winning trades than you lose on your losing trades. This allows you to be wrong half of the time and still make money.
Think about it, if you lose $100 on your losing trades, and you have five losing trades, you lose $500. And if you make $200 on your winning trades and you have five winning trades, you make $1,000. Lose $500, make $1,000. You still have $500, even if half of your trades are losing trades.
So how do you deal with losses?
- First, you have to accept the fact that there will be losses.
- Second, you have to keep them small. And as a rule of thumb, I recommend that you never risk more than 2% of your account on any given trade.
- Third, make more money on your winning trades than you lose on your losing trades.
You can swing for the fences, risking $100 trying to make $500 or $1,000 but that's not very likely. Aim for small, but consistent profits.
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