Planning losses over a longer series of transactions increases the quality of our trading and, in the event of failure, allows you to avoid ruining your deposit.
The chances of a successful transaction are determined by many factors, such as skills, market conditions, random events , extraordinary circumstances, etc. Someone who focuses on a single move must know that the final result that determines its success consists of many such transactions . It is not 10, 20 or 30 plays, but even several hundred and you have to be aware of that.
Playing the market is like a coin toss. You should not focus on a single move, but perform a longer series of transactions
Sometimes a transaction will be profitable and sometimes not, and this is perfectly normal. You can plan your losses before we even start playing on the market
Risking a proportionate part of your capital allows you to withstand even longer series of losses without major consequences.
It is not single losses, but series of losses that ruin our deposit
Therefore, what should interest us is the longer series of plays and how many times the success event occurs and how many times the failure event occurs. If we define trading only on the basis of these two features, then on this basis we can compare it to a coin toss. It’s also good to make an appointment that you pay more for an eagle than for heads. You should always expect a black series of losses. This applies as much to tossing a coin as to trading.
If the events are mixed up, it does not affect the ruin of our deposit. You will lose twice, you will earn once, etc. with an appropriate risk-to-risk ratio . What causes the account to be reset is the black series of losses that cannot be made up for with one or two trades.
Sometimes such a series of losses occurs at the very beginning and constitutes a huge psychological burden for us. In most cases, however, we can expect even a few such series in short intervals. This mainly applies to trend strategies, where catching a long move is paid for with many unsuccessful trades.
There is always risk where profits are to be expected
At this point, we might ask ourselves a question. Is it possible to somehow deal with this problem? In order to find a meaningful answer to this complex problem, let’s first look at the risk involved in the general characteristics of investments.
Thus, a farmer must first lose some capital in order to buy and plant seeds before he starts harvesting the fruits of his field. Before an entrepreneur starts counting profits, he must first invest an appropriate part of his capital in semi-finished products, which he will then process and sell at a profit.
So whether it is a farmer or an entrepreneur, each of them takes the risk in order to earn. The farmer runs the risk of losing the crops, and the entrepreneur runs the risk of not selling his products. However, each of them knows that it is not always raining and that there is not every day business traffic, and the stagnation may even last several days in a row.
For example, a person who runs a shop or restaurant never knows whether he will have enough customers on a given day to pay his employees, bills, earn money for current activities and generate profits, and yet he earns in the long term. Literally the same way, a trader in the market risks a proportionate share of his capital to earn over more trades.
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Losses are the same as an investment that when consciously used brings profit
Each loss is nothing more than a partial investment that allows us to keep us ready for the emergence of a trend that will carry our boat downstream like a wave. But when it will happen, no one knows. However, we can be sure that just as the tide follows the ebb, the same will be on the market.
Low volatility is followed by high volatility, which is a hint for us. If we only place orders in accordance with the system, sometimes our trade will bring profit and sometimes it will not bring profit, and no wonder. Regardless, every loss incurred is an investment that keeps us on standby.
These losses must, however, remain at a certain level. Anyone who takes up the game on the stock market must be aware of the fact that such losses can be up to a dozen in a row. In this sense, a real and professional investor is first and foremost a risk manager.
Taking into account a certain amount of losses is an element of control over the strategy
During the investment process, both profits and losses are limited commodities that run out like fuel in a car. Generally, the point is that in the scale of a certain number of transactions, we can afford to plan a certain number of failures and the expected number of successes.
The relationship of the two factors to each other shows the ultimate success over the long term. If we only use up all the risk, it is obvious that it is high time to finish the series and not go further without a proper portfolio analysis. The awareness of the risk understood in this way means that we do not waste a pool of losing trades for any reason, but we carefully choose those games that give us a real chance to gain the expected profits.
Obviously, these profits should be in an appropriate proportion to the risk incurred and the number of hits expected. Obviously, the more the better, but some minimum number of successes and maximum number of losses should be included in the investment strategy, even before trading.
In this way, we build a fundamental framework for our activity in the market, which is subject to statistical measurements. A well-structured risk-taking strategy should not be a reason for wiping your account.