The number one way new traders fail is in counting their trading profits, or the money that could be made on the trade before the trade is even placed. Pro traders know you should be focusing on how much they could lose on the trade.
To succeed you must be able to accept the risks and apply money management techniques such as stop loss orders, max daily loss limits, and account draw down rules.
Think Risk First, Then Reward
When you focus on, and accept the risk of losing, the doorway to profits will open. A saying I use is, when in doubt, wait it out. If you’re in a position and are feeling anxious and want to get out early, it usually leads to taking profits too soon.
Here are 3 ways you can limit the losses to keep more trading profits:
Stop Loss Orders
In order to limit downside risk, a stop loss must be placed on every trade. It is imperative to your long term success that you do this. There is no getting around losing trades, we all have them. The key is to keep those losers as small as possible, and give your winners a chance to take shape.
Be quick to exit when the position is going against you, slow to exit when it’s going you way.
2 crucial rules for stop loss orders
- Stops must be placed at the time of entry
- A stop can only be tightened, never widened
Max Daily Loss Limits
To prevent the dreaded “blow up” of your account you must place a max daily loss limit on your account. Don’t just write it down on a post it. I recommend setting a hard loss limit with your broker to ensure this rule will be followed.
When we are at our weakest is when our rules become the most important, yet the hardest to follow.
Limit your max daily loss to no more than 5% of your account balance (and this is even a high number). Still, this ensures that you will live to trade another day and not lose everything on what is in some cases, one bad decision or mistake.
Draw Down Rules
Another way to limit your risk is to cease trading after 2 full stop outs on the day. If you have two stop outs, the market is telling you that it is not conducive to your setups that day and you need to stop trading.
There are methods for scaling out of your positions in which you may sell half at a smaller profit target. If you get taken out of the remaining portion of your trade after this first target is hit I do not consider that a full stop out.
Does Your P/L Statement Look Like This?
Chances are your profit/loss statements are made up of a handful of average days, a few big winning days and a few big losing days. If you can eliminate the big loser the profits can emerge. Once you can successfully manage your losses your trading profits will follow.
What other ways can you think of to limit losses?
I’d love to hear from you below!