As I discussed, traders need to treat trading as a business and not a casino. Most of the focus is generally on the revenue side. . After all, you need profitable trades to run a business.
The focus of this article will be on the cost side, which is perhaps the most important factor in being a successful trader. As with any business, revenue has to exceed costs to be profitable. It is no different in trading.
I was talking to an experienced trader recently who said, “I hate stops but they are a necessary evil.” By evil he was referring to the times he had the right trading idea but got stopped, only to see the market move his way without him being on board.
This has happened to all of us but what choice do we have?
Using stops to protect your downside is the only way to stay in the trading business. It is like catastrophic insurance, which you need to protect your assets in case of a disaster.
The forex landscape is littered with carcasses of failed traders who traded without stops. It may have worked for a while but disaster struck when the market went into a one-way move, the wrong way. This either led to an account getting wiped out or the trader panicking, generally near the top or bottom, and closing the position. Even worse is trying to double or triple up in the hope you can outlast the market, not a strategy I would suggest.
Remember, it only takes one disastrous trade where you lose more than you intended to send you into the Forex Death Spiral that you will never recover from.
Is it a matter of damned if you do (use stops) or damned if you don’t (no stops)? The answer here is also an emphatic no! Stops are a necessary evil and everyone should use them. It is how you use stops and where you place them that can make the difference.
- Where you place your stop will determine whether your trade has time to work
- Getting angry at the market after getting stopped can lead to further losses
- Letting a loser run and/or using hedging to avoid booking a loss is a losing strategy
If you treat trading as a business you need to control your expenses relative to your revenue. This is why you need to use stops. This is what I see as necessary to be a successful trader.
I have written several articles covering the points made above and suggest reading each one carefully. Together these articles should give you insights into using stops, not only to protect your downside but also to achieve the goals set out in your business plan.
How to Treat Your Trading as a Business.
How to Avoid the Forex Death Spiral
How to Avoid Dumb Trades and Dumb Stops and Make Money Doing It
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