Trading Is A Business
In every business there will be costs. If you are opening a brick and mortar business, you will probably have to pay for rent, electricity, water bills etc. When it comes to trading, money is actually your tool to make profits. In other businesses, they will create something and then sell it. In trading, you are using your existing pool of money to create more money.
Losing Is Part Of The Game
If I would tell you that there will be no losing in trading, I would be lying to you. There will be losses in trading due to wrong execution, market volatility, gaps, mistakes and everything in between. If you do not condition your mind to accept the fact that there will losses, you will learn nothing and the fear of losing will make you not trade at all.
Losing A Reasonable Amount Is Fine
Now that you have accepted the fact that trading entails losing, you need to know that it is only ok to lose a small amount. Losing half of your portfolio in one single trade is stupid. That is not trading but gambling putting all your money into one single idea. However, losing 1%-5% of your portfolio in a single trade is ok. As long as the other winning trades cover your losses in the long run.
Let Your Winners Take Care Of Your Losses
Winners will always take care of your losses provided
If you have a strategy with a success rate of 70%. You will make money in the long run. On the other hand if you have a strategy with a success rate of 40% but a win loss ratio of 2 to 1, you will still make money in the long run because your wins are much bigger than your losses.
- Your strategy has a high success rate
- or Your win to loss ratio is good
If you have a strategy with a success rate of 70%. You will make money in the long run. On the other hand if you have a strategy with a success rate of 40% but a win loss ratio of 2 to 1, you will still make money in the long run because your wins are much bigger than your losses.
