Don’t Avoid Losses

 

You might wonder, reading the headline of this post. Because everywhere you read avoid losses. But as and when you understand Trading as a Business, you will not avoid losses, you embrace loss. Losses will affect your psychology very badly. In business losses are part of the game, only in Trading people consider losses differently. You need to develop your psychology very profoundly around losses. Because practically you cant avoid losses in normal business and in trading also. Only solution for losses to accept the loss, and move on, but question remain, how you can become profitable if we take loss? The answer is simple,

1. Have more winning trade compare to Lossing trades (Winning Ratio > Losing Ratio)
2.  Have more profits in Profitable trades, compare to losses in loosing trades (Risk to Reward Ratio)
3. Don’t loss more than you afford.

See following table carefully, If you Lose X% how many Y% required to get your amount.

If You Lose	Gain Required to Breakeven
5%	5.26%
10%	11.11%
20%	25.00%
30%	42.86%
40%	66.67%
50%	100.00%
75%	300.00%
90%	900.00%

So, take the loss you can easily get it back. For this you need to design your system in such a way that, you can easily get back your lose. For example, if you take 5% Drawdown system, your system must generate 3% to 4% monthly return. So, you can easily get you lost money in 1 to 2 months. Don’t try to get your loss back in 1 trade, its not possible.

Keep your losses small and winners big, it’s a old saying, its right, nothing wrong in that. Avoiding losses is a sure way to make them bigger.

“If you can’t take a small loss, sooner or later, you will take the mother of all losses” – Ed Seykota

Following your guidelines and seeing success with a string of minor wins and loses is possible, but one large loss can completely wipe you out. It's a frustrating setback, but you can't stop it from happening because you have no control over the markets.

There are moments when losing is winning. (Book - Winning the loser’s Game by Charles D Ellis) The secret is to alter your perspective on trading. You can achieve actual success by changing your definition of a successful deal from one that is profitable to one that complies with your criteria. It will be challenging because this is so illogical. You can actually tell yourself to do this, but in most cases you only truly believe something after experiencing it. The transition arises as a result of your growing commitment to a rules-based strategy. I believe only rule based trading can become you profitable trader. You can trade manually or by algo, you must follow rules. The rules you apply while back testing your strategy.

If you think making money by trading is easy, it won't be long before you're out of business unless you change your way of thinking.

Do Read, Our First Commandment “Do Focus on Managing Risk”

  

Happy Investing & Trading

The ValuePlusOptions Team