It’s also important to avoid letting any loss, especially those in losing streaks or losing trends cause you to change your method of investing. This is a hard thing for many new market participants to avoid but it’s critical to success. You have purchased a successful system. That system won’t be right all the time, but it is designed to be consistently right over time. Your ability to consistently apply that system when it works and when it doesn’t work is key to your success in the markets.
The other trap people fall into is changing their system because of profits. If one or two trades go very well, they may increase the amount they risk on each trade to help their portfolios increase in value more quickly. This sort of response is just as dangerous as any response to losses. Stay focused on your system…not results!
Please take some time to really think about your situation and your emotional responses to loss or gains. If you’ve never traded with real money before, this can be difficult and you may come back to this exercise after having entered your first few real money positions.
Most traders or investors cannot tolerate more than 15% loss to their equity, although this varies greatly from one individual to another. Even one individual’s tolerance can vary depending on life circumstances and how confident they feel.
Remember, losses on any one trade or even over a few trades does not make you a failure and will not affect your long-term profitability in the markets unless you allow yourself to get pulled away from your proven approach.
Optimal Trade Risk
An important part of any trade plan is proper money management which includes the amount you should put into or risk on each position you take. Knowing both your trade frequency and how a losing streak might affect your account helps you develop a plan you can follow during all market conditions. It helps guide your decisions for how frequently you want to trade and how much you want to risk on any one position. It will also help you prepare mentally and emotionally for handling losing streaks more positively as you continue your consistent approach to the markets.
Using the information you determined from previous sections of this lesson, use the table below to determine how much you should invest into any one position. Information for the example:
- Your portfolio size: $150,000
- Trade Style: Just Win
- Trade Frequency: 120 – 170 a year
- Longest Likely Losing Trend: 12
- Risk Tolerance: Average
Now using this information, look at the chart below. The second row down has 9-12 losses. Follow that row over to the average risk tolerance of 1.3%. Use this information to determine the maximum amount you would risk per trade:
$150,000 x 1.3% = $19,500 maximum loss ÷ 12 longest likely losing streak = $1,625 risked per trade.