Are you prepared to lose? (and what to do if you are not)
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A new trader, let's call her Sarah, has just started trading in the crypto market. She has been reading articles and watching videos about trading, but hasn't taken the time to develop a solid trading plan, or to gain a good understanding of the markets and underlying assets she is trading.
Sarah sees bitcoin's value is going up, she doesn't do any further research or analysis, she doesn't set a stop loss or take profit level, she just buys bitcoin, with the expectation that she will make a quick profit.
Unfortunately, the value of bitcoin doesn't perform as well as Sarah had hoped, and instead of going up, it starts to go down. Sarah gets anxious and starts checking the bitcoin's value frequently, and since she didn't set a stop loss, she watches as her position continues to lose value. Eventually, the bitcoin loses so much value that Sarah is forced to sell it at a large loss.
Feeling disheartened, Sarah starts to second-guess herself and her abilities as a trader. She didn't have a plan or a strategy, didn't manage her risk properly, and didn't have a clear understanding of the markets and the underlying asset. She didn't prepare for the possibility of losses and didn't have a plan for exiting losing positions.
😭😖😞Unfortunately, the story above is very common in trading, so how can we prepare for losing trades?
☝🏽 Preparing for the possibility of losses is an important part of risk management and can help traders to minimize the impact of losses on their trading capital. Some ways to prepare for the possibility of losses include:
1️⃣ Setting realistic trading goals: Traders should set realistic goals that take into account the inherent risks of trading and the potential for losses. By setting realistic goals, traders will be better prepared to handle losses when they do occur.
2️⃣ Establishing a risk management plan: This includes determining the appropriate size of each trade, placing stop-loss orders, and evaluating the potential reward relative to the potential risk. This can help to limit potential losses and protect trading capital.
3️⃣ Maintaining a proper risk-reward ratio: This means that the potential reward of a trade should be greater than the potential loss. This helps ensure that the potential reward justifies the potential risk.
4️⃣ Diversifying the portfolio: By spreading capital across a variety of different markets and instruments, traders can reduce overall portfolio risk and minimize the impact of losses in any one market or instrument.
5️⃣ Building a trading cushion: This means keeping a reserve of capital that can be used to absorb losses and maintain the trader's ability to continue trading. This cushion should be large enough to withstand a series of losses, but not so large that it affects the trader's ability to trade effectively.
6️⃣ Emotionally preparing for losses: It's important to remember that losses are a normal part of trading and to not let them affect you emotionally. By preparing emotionally for the possibility of losses, traders will be better able to handle them when they occur.
7️⃣ Have a plan for exiting losing positions: Having a plan for exiting losing positions will help to minimize the impact of losses on the portfolio. This could include setting a stop loss or taking profits at predetermined targets.
⚠️ Remember, it's important to accept that losses are a normal part of trading and that they are not a reflection of the trader's ability. By preparing for the possibility of losses and implementing a solid risk management plan, traders can minimize the impact of losses and increase the chances of long-term success.
I hope this has been informative to you, and if it was, please leave a like or a comment below.
👇🏽👇🏽👇🏽
Thanks for your visit!
Sarah sees bitcoin's value is going up, she doesn't do any further research or analysis, she doesn't set a stop loss or take profit level, she just buys bitcoin, with the expectation that she will make a quick profit.
Unfortunately, the value of bitcoin doesn't perform as well as Sarah had hoped, and instead of going up, it starts to go down. Sarah gets anxious and starts checking the bitcoin's value frequently, and since she didn't set a stop loss, she watches as her position continues to lose value. Eventually, the bitcoin loses so much value that Sarah is forced to sell it at a large loss.
Feeling disheartened, Sarah starts to second-guess herself and her abilities as a trader. She didn't have a plan or a strategy, didn't manage her risk properly, and didn't have a clear understanding of the markets and the underlying asset. She didn't prepare for the possibility of losses and didn't have a plan for exiting losing positions.
😭😖😞Unfortunately, the story above is very common in trading, so how can we prepare for losing trades?
☝🏽 Preparing for the possibility of losses is an important part of risk management and can help traders to minimize the impact of losses on their trading capital. Some ways to prepare for the possibility of losses include:
1️⃣ Setting realistic trading goals: Traders should set realistic goals that take into account the inherent risks of trading and the potential for losses. By setting realistic goals, traders will be better prepared to handle losses when they do occur.
2️⃣ Establishing a risk management plan: This includes determining the appropriate size of each trade, placing stop-loss orders, and evaluating the potential reward relative to the potential risk. This can help to limit potential losses and protect trading capital.
3️⃣ Maintaining a proper risk-reward ratio: This means that the potential reward of a trade should be greater than the potential loss. This helps ensure that the potential reward justifies the potential risk.
4️⃣ Diversifying the portfolio: By spreading capital across a variety of different markets and instruments, traders can reduce overall portfolio risk and minimize the impact of losses in any one market or instrument.
5️⃣ Building a trading cushion: This means keeping a reserve of capital that can be used to absorb losses and maintain the trader's ability to continue trading. This cushion should be large enough to withstand a series of losses, but not so large that it affects the trader's ability to trade effectively.
6️⃣ Emotionally preparing for losses: It's important to remember that losses are a normal part of trading and to not let them affect you emotionally. By preparing emotionally for the possibility of losses, traders will be better able to handle them when they occur.
7️⃣ Have a plan for exiting losing positions: Having a plan for exiting losing positions will help to minimize the impact of losses on the portfolio. This could include setting a stop loss or taking profits at predetermined targets.
⚠️ Remember, it's important to accept that losses are a normal part of trading and that they are not a reflection of the trader's ability. By preparing for the possibility of losses and implementing a solid risk management plan, traders can minimize the impact of losses and increase the chances of long-term success.
I hope this has been informative to you, and if it was, please leave a like or a comment below.
👇🏽👇🏽👇🏽
Thanks for your visit!
Nota
Some other educational posts you might find useful: 👉🏽 What is a trading plan and why do you need one?
👉🏽 Why you should NOT buy or trade signals!
👉🏽 The 90-90-90 rule - Why do traders fail?
👉🏽 Pay yourself first! - Why you should do this!
👉🏽 Bitcoin DCA - The best strategy for most
👉🏽 Stop loss hunting and the whipsaw effect explained
👉🏽 The benefits of trading a demo account
👉🏽 The Cypther Pattern explained
👉🏽 The classic 2618 trade
Check out my FREE indicator scripts:
► tradingview.com/u/Nico.Muselle/
Twitter: twitter.com/NicoMuselle
► tradingview.com/u/Nico.Muselle/
Twitter: twitter.com/NicoMuselle
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