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3 Key Ways To Handle Trading Losses

1. Have a trading edge. Define your trade setups well and be sure they have an edge. By edge I mean that these setups have a certain probability of winning over a large number of trades. In other words, based on your trading experience or historical testing, your trade setup has a positive expectancy that over, say, 100 trades some percentage (e.g., 67%) will be winners. If you don’t have a trading edge, you are likely trading random patterns and you are likely to have many, many losses.

2. Know the probabilities of your edge and think in terms of these probabilities. No trade setup works 100 percent of the time. If, for example, your edge has a 67% win rate, then you know that it also has a 33% loss rate. One out of every three trades is expected to be a loser. Knowing this gives you some psychological cover. When you do have a loss, it isn’t the ‘end of the world’ for you. It is simply an expected outcome of your edge.

3. Keep your risk well within levels you can tolerate. Keep in mind that psychologically, we amplify the experience of a loss. Studies show that we tend to experience a loss about 2.5 times the magnitude of a win of a similar size. In other words, if we have a winning trade of $1,000, we feel good. If we lose $1,000, it feels like we’ve lost $2,500. If you keep your risk at reasonable levels, then a loss is not experienced as painful. A good rule of thumb is to keep your risk level to between 1% and 2% of your account equity for any given trade.

Trading is a demanding game to master. Part of that game is to be able to handle the psychological experience of losses and this doesn’t come in the form of a pill.


Article Source: EzineArticles


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