Monday, August 30, 2010

Losing Trades are a Natural Part of Trading

Novice traders have a great deal of trouble accepting the notion that losing trades are a "natural" part of trading. Yet, if you are actively "cutting your losses" on trades that don't go in your favor, a losing trade can actually be thought of as a positive step, because it is the act of consistently limiting your losses to a manageable amount which allows you to keep coming back to trade another day. While losing money on a given trade is not in itself a good thing, the very act of keeping each individual loss to a minimum is a necessary step in trading profitably over the long run.

When starting out, traders often shoot for a high percentage of winning trades, even though that generally means taking profits quickly and missing some big winners. More experienced traders come to realize that the percentage of
which are winners is often a meaningless statistic. In the end, the only thing that counts is if the amount earned on winning trades exceed the amount lost on losing trades. As long as that is the case, it matters little if 3 out of 10 trades are profitable or if 7 out of 10 trades are profitable. The key is to make alot when you win and to lose a little when you lose.

Came across this article in a forwarded email.