Posted on November 9, 2009 - by Alvin

Protect Yourself Against Irrecoverable Loss

Photo by jin.thai

Previously, I have written a post on how to minimize losses in trading through position sizing and stop loss limit. There is something that needs to be addressed further to ensure you can survive the unforgiving market. Stop loss limit is to prevent you from losing too much on a single trade and position sizing protects you from risking too much capital. The issue to be addressed is, “what if you have a string of losses?”

The most effective answer to the question is to stop trading. Yes, stop trading. It is harder to stop when you are losing. This is because you want to get “revenge” from the market. This is where the trader makes his/her deadly move as he/she is likely to lose even more. Worse, the trader may even resort to overtrading, taking large leverage to recover the previous string of losses. Instead of earning profits, the trader ended up losing all the capital and even land himself in debt.

The problem with most investors who started to get involved in the markets always have the “profits perspective”. They will be thinking like, “it is a place where my money can earn even more money”, or “If I can win consistently, I will be rich!” They participate in the market with excitement over the potential profits. This is natural as everyone wants to gain something out of it, if not, why invest in the first place? Read more…

Related posts:

1. Minimize loss = Position Sizing and Stop Loss Limit
2. When stop loss order fails
3. Insurance should protect against your worst case scenarios