Successful and consistent trading is a result of hard work and persistence. A trader spends a great deal of time identifying potentially profitable trades and executing them to precision. Identifying a potentially good stock is not enough. Entering at an appropriate time is equally important. This requires a certain level of skill and expertise.
After entering into a trade the next most important aspect is the stop loss. An appropriate stop loss is crucial to the success of a trade. A tight stop loss can stop one out of the trade too quickly and one too far away can result in big losses should the trade backfire. Timely trailing of the stop loss at regular intervals is also very important to lock in profits.
The market moves up and down with infinite variables at play and no amount of calculations can help one determine or identify the perfect trade. It always boils down to the probabilities-the probability of being either right or wrong. Either the trade moves in the desired direction or it does not.
Despite all efforts, many novice traders tend to accumulate losses as their winners are smaller in size as compared to their losers. This brings in a degree of frustration in the mind of the trader and he begins looking at the market differently.
At the onset of his trading journey, the trader is optimistic about the market and is almost always slightly reckless. He is positive about winning and keeps on trading with the hope of riding winners.
Once the losses begin to accumulate, his outlook takes a hundred and eighty-degree turn and the trader becomes astute in his view of the market. He looks at every trade with skepticism. Where earlier his objective was to earn money, his objective now is more focused on covering his losses.
This diversion in objective leads the trader to approach the market with a revengeful attitude where his prime concern is to recover his capital from the market. This vindictive approach leads the trader into a whirlpool of negativity where he makes more mistakes and loses more money. Coupled with a deep sense of frustration and defeat, the trader is blinded to the many opportunities the market has to offer and loses out on many winning situations. He overtrades and also trades beyond his position sizing capacity.
Cumulatively it all results in greater losses till ultimately he is rendered financially paralyzed. His capital is wiped out and he cannot trade any further.
Chasing a loss is like trying to catch one’s shadow and is never a successful venture. Rather, a trader should absorb his loss, identify his mistake, and rectify it to prevent another loss.
Profit and loss are a part of every business. But this statement is magnified ten folds when applied to the markets. Losses are small and opportunities are many. And every opportunity is an opportunity of probability with a chance to win and a chance to lose.