Over confidence in trading can be deadly. All this nonsense that some tutors try to sell you about adopting a winning mindset or 'can't lose' trading systems play into your greedy rat brain, and serve to suck money off you with their promises of mega moolah. Good traders however approach the markets as losers - not winners; they fear the consequences of several trades going against them.
Remember losses count. In fact they count more than gains because of the disproportionate return required to get your money back. There is a tough rule of financial mathematics that states that a 10% loss cannot be made up by a 10% gain. A 10% loss on a £5000 portfolio would amount to £500 - you would have £4500 left, if you manage to recover the 10% you would end up with £4950 (£50 short from your original investment even though you recovered in percentage terms).
Do not trade on hope. 'Riding it out' and transforming a shorter-term trade into a longer term hold is not the answer, it is NOT trading. Head these words....USE STOPS. Don't hope that losses will reverse; either learn to cut your losses quickly or you will inevitably at some point lose your shirt. So use stop loss orders unless you want to gamble your money! Risk control and mitigation are key to surviving in this business.
Likewise, don't fall in love with a share. Blind love doesn't pay in trading as in marriage. You should always take an objective view no matter how much you like the enterpise or its products and should the company issue a trading statement where management state that they are experiencing tough trading conditions, then you have no reason not to believe them; never be afraid to take a loss. A bad trading update might be the precursor of worse things to come.
Make sure you know what a stop loss order is and understand what stop loss sizes are and the significance that they can have in not only limiting your risk but also determining the bet size that you should take. Industry research shows that a number of spread betting accounts are opened with just £1,000 (which in my opinion is very low). A way to limit your risk is to limit your loss to no more than, say, 5% of your trading pot. Thus, someone who has £1,000 in his account shouldn't risk more than £50 (5/100 X 1,000). If the instrument's chart suggests a stop level 50 points away, then the right stake would be £1 a point.
Do not move your stop loss once set. The whole point of using stop loss orders is to keep losses at a manageable level so as
to preserve your capital to take advantage of winning trades. A way to do this is to stick to a fixed ratio to compute the profit per trade versus the loss; for instance if you use a 3:1 ratio, if your stop is set 30 points away, the limit price would be set at 90 (this way one winning trade would then pay for three losing ones). Another strategy is to use charts to identify exist levels. You might choose to exit a spread bet at a set percentage away from the entry price, at a previous historic resistance line or at a technical area as suggested Fibonacci or Gann levels.
Your trade is most at risk at the start as your stop loss is likely to be quite close at this point. Once the trade has moved well into positive territory you can move the stop loss level such that you basically breakeven and from then on you are just riding the trade... As the trade continues moving in your direction you can even add to it (since you are already in profit anyway).
If the position is going against you, never move your stop further away. If you get stopped out, so be it. There's always another trade. In my experience, moving your stop in very short-term positions is an undisciplined trading style and compounds your losses. You have set that stop for a reason so don't get carried away. Remember, no stop loss will work if you keep moving it further and further away from your original position.
Psychology is also a crucial factor to success in this game (though money is to be taken seriously) and it has helped me to view my profits and losses whether in running or closed as 'points' instead of £, so as to remove the emotion. Also, when one has a loss, it can help to view it as a friendly donation to the markets, as some you win and some you lose, with the hope that you are hopefully profitable in this game overall. Psychology is crucial and there's a fine line to remaining in control of your temperament... Many times you would be amazed at the stops used by professionals, this is where psychology enters into trading and most people can't stand to see a position underwater so panic and set a stop closer or manually close the position. This is where your plan should come into action, for example if you're using a moving average cross to trade then you should wait for it to cross, backtest any moving average x trade and even for very successful trades you will usually see that the moving averages came very close to crossing before carrying on parting again. You can learn all you want about trading but if you do not have the right psychology for it then imo you will probably fail!
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