It is important for a trader to be good at both offense and defense. When trading in the market, good offense can make you a lot of money. However, good defense is much more important than good offense as it helps preserve your hard earned profits. Let’s discuss in this article what to do to avoid giving back profits and losing money to the market.
Avoid the chop and whipsaw
One of the best things you can do to avoid losing large sums of money is to never trade out of thin air when there simply is nothing to trade.
The more time you spend studying the charts to make sense of them when there is simple nothing to trade, the higher chance you will lose. A good trade should jump out at you without having to stare at the charts for long time.
If there is no signal, don’t trade. If it’s not there, it’s not there. There is no trend, no signal, just avoid it.
Also, if the market is choppy, you will be more likely to make a trade that isn’t there. Good and obvious trades form in trending markets from key chart levels, not in sideways chop. If you trade them, you are more likely to be successful.
The market is guided by levels and if the market you’re looking at isn’t clearly demonstrating and respecting levels, then it is best to stay away for some time. You should be careful when the market is acting friendly or unfriendly. The market will tell you what it’s doing around key levels; breaking, holding, re-testing etc.
The only way to avoid losing your shirt is to follow the wisdom.
Don’t take risks that you can’t afford to lose
Every person including myself at times has risked well above their limit whether it’s adding to a position, risking too much per trade or just being greedy. If you want to survive in the market, you must start thinking about the money as if it’s real and in your hand. You must determine your set amount per trade, your initial trading capital till you can prove to yourself that you are successful for a period of time. These parameters and dollar amounts should not change under any circumstances.
Let us say your risk per trade is $100, don’t change that until you’ve had a period of success because there’s just no logical reason to do so. There’s no point in trading if you don’t aim to make at least a 1:1 risk reward per trade or greater. You should consider trading with a more conservative approach when you first start trading.
Day-Trading fallacy and over-trading
Majority of traders gives in to temptation of day-trading and as result lose their money to the markets. You must learn to let trades play out without interfering. You can get on board big moves in the market by being patient and leaving your trades alone.
As a small retail trader, you need to wait patiently for good and well formed trades at key levels and then take decent size positions which you can hold for a period of days or even weeks. Temptation to give into day-trading, jumping in and out of the market multiple times a day, is a loosing game that will leave you frustrated, angry and broke.
Develop and maintain the proper trading mindset
You should trade as if you are a robot and you must be neutral. Don’t care whether your trade wins or loses. Once you start caring, you start getting emotional and that leads to trading mistakes such as over-trading or risking too much.
Money management is a big factor in the emotional side of trading. The idea of losing money is more than just a simple mathematical calculation. The very idea of losing can cause you to feel frustrated and upset. Trading is essentially a game of numbers and mathematics. You need to be able to apply the basic principles of these concepts and remain emotionally neutral and objective. This is not a game of luck but rather a game of mathematics and risk management.