Jenny sees that the price of bitcoin is going up. She doesn't do any more research or analysis, and she doesn't set a take profit or stop loss level. Instead, she just buys bitcoin in the hopes of making a quick profit.
Jenny had hoped that the value of bitcoin would go up, but instead it starts to go down. Jenny starts to worry and checks the value of the bitcoin more often. Since she didn't set a stop loss, she watches as her position keeps losing value. In the end, the bitcoin loses so much of its value that Jenny has to sell it for a big loss.
When Jenny is upset, she starts to doubt herself and her skills as a trader. She didn't have a plan or strategy, didn't handle her risks well, and didn't have a clear understanding of the markets and the underlying asset. She didn't think about the strategy that she might lose and didn't have a plan for how to get out of losing positions.
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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:
Establishing a risk management plan: This means figuring out how big each trade should be, putting in stop-loss orders, and weighing the potential reward against the potential risk. This can help keep trading capital safe and limit the amount of money that could be lost.
Diversifying the portfolio: By putting money into many different markets and instruments, traders can lower the risk of their portfolios as a whole and lessen the impact of losses in any one market or instrument.
Setting realistic trading goals: Traders should set goals that are realistic and take into account the risks of trading and the fact that they could lose money. Traders will be better able to handle losses when they happen if they set goals that are realistic.
Have a plan for exiting losing positions: Having a plan for how to get out of losing positions will help to keep losses from hurting the portfolio too much. This could mean setting a "stop loss" or taking profits when you reach a certain goal.
Maintaining a proper risk-reward ratio: This means that a trade's possible gain should be bigger than its possible loss. This helps make sure that the possible payoff is worth the possible risk.
Emotionally preparing for losses: Losses are a normal part of trading, so it's important to keep that in mind and not let them get to you emotionally. Traders will be better able to handle losses when they happen if they are emotionally ready for them.
Building a trading cushion: This means keeping a reserve of capital that can be used to cover losses and keep the trader's ability to continue trading. This cushion should be big enough to handle a string of losses, but not so big that it makes it hard for the trader to do his or her job.
Remember that it's important to realize that losses are a normal part of trading and do not show how good a trader is. Traders can make losses less painful and improve their chances of long-term success by preparing for the possibility of losses and putting a solid risk management plan into action.
I hope you learned something from this, and if you did, please like or comment below.