WHY DO PEOPLE OFTEN LOSE MORE AFTER A SUPER-PROFITABLE DEAL?
It is not very difficult to execute a profitable trade in the Forex, futures or stock market. The chance of it equals 50%, which is quite favourable for a probability to make a profit. The really difficult part is to save the received profit.
How many times after receiving a big profit did you lose it completely in the next trade? How often did the loss you made in the next trade exceed the profit you made in the previous trade? It’s high time you stopped this cycle of fast rises and falls. If you intend to stably build-up your trading capital and become a profitable trader you need to learn how to protect your profit. This article will explain to you how to do it. By the time you finish reading this article you will have three steps in your arsenal, by holding which you will be able to protect your profit.
- In this article:
- What is a big profit?
- Step 1: immediately insert a trade into the log.
- Step 2: have a rest from trading.
- Step 3: reduce the position size twice.
- Closing remarks.
What is a big profit?
Of course, this is an elastic term and what one trader considers to be a big profit, perhaps, would differ from your idea of its size. That is why it is very important to use percentage indicators when we discuss this topic. In the end, the profit in the amount of USD 100 would be much more significant for a trader whose trading capital is USD 500 than for a trader with the capital of USD 10,000.
The majority of traders would consider the risk-reward ratio of 1:3 to be ideal. It means that a trader plans to make three points of profit for one point of risk. At the same time, there is no reason why a trader shouldn’t look for opportunities in the market, which would allow him to use pyramiding. It means that if the situation in the market develops in accordance with his trading plan, a trader could execute two or three trades in the direction of the earlier identified goal of the profit registration.
Even if a trader risks 1% of his trading capital in one trade, it might bring him 5-10% of profit. And again, this assumes that everything is realized in accordance with his trading plan. Profit in the amount of 5-10% of the trading capital could already be considered a big one. It might not sound convincing, but if we speak about a major trading capital, its increase by 5% would constitute a significant amount of money.
Step 1: immediately insert a trade into the log
The first thing a trader should do after receiving a big profit is to insert it into his log. It is very important to do it as soon as possible no matter whether he keeps his log on paper, in the form of an electronic table or in the form of a complex online log. It might seem strange at the beginning. In the end, what is the difference at what time a trader inserts the received profit into his log? The thing is this.
Quite often big profits in trading might appear during a short period of time. Sometimes a trader puts the risk of 1-2% of his trading capital into one trade and, as a result, increases his capital by 5% or even 10% during one week. We all had such profitable trades when we didn’t believe our eyes how smoothly they passed. Immediate documenting of what took place will help you to register the result and will bring sense to it.
After that, the fact of receiving a big profit ceases to be just a random event and becomes a trade, which you executed on the basis of certain criteria. Immediate documenting of a profitable trade will also help you to convince yourself that this income is yours.
Step 2: have a rest from trading
This, probably, is the most undervalued step in the whole process of trading. The majority of traders, after making a big profit, tend to make the new capital work. That is why instead of taking a break they throw it back to the market in the next trade. A common reason for such a behaviour of a trader is the house money effect. This effect manifests itself in those periods when a trader feels a higher readiness to take high risks due to the just received profit.
Let’s imagine for a minute that your trading capital is USD 10,000. You’ve just closed a trade with the profit of USD 1,000, which increased your trading capital by 10%. Now your capital is USD 11,000. The house money effect tells you that you are ready now to take a higher risk. But why?
It seems to you that this USD 1,000 was a gift, although you earned it honestly in the market several minutes ago. In other words, you do not perceive this USD 1,000 as a ‘legitimate’ part of your trading capital. If you haven’t been in such a situation before, it is easy to assume what happens next. Most probably, you would immediately execute a new trade just to see whether it moves in the profitable direction. Even if one or two of such trades will bring you profit again, a loss-making trade, which would destroy the received profit in full, is inevitably approaching. So, how would having a rest from trading help you to fix the achieved success?
In simple words, having a rest from trading helps to smooth your emotions. We are all human beings and all traders have emotions. In fact, it is much more important for a trader to pay attention to the fact of appearance of emotions itself during trading than trying to suppress them. That is why, if you make a break in trading, you have time to get your thoughts together and cool down your boiling emotions.
The length of this break depends on you. It could be a short break for one day only or a long one for one or even two weeks. Nevertheless, if you make a big profit in trading, it is better to stop trading for at least 24 hours. If the profit was really big and exceeded your highest expectations, then you can have a 2-3 days rest.
Nevertheless, it is not always easy to make a decision to have a rest. We are traders and trading in the financial markets is our work. However, any person can execute trades in the market since one doesn’t need to have special skills for pressing Buy and Sell buttons. Namely that is why we can state that the trader’s work is not as much in trading as in understanding when a trader shouldn’t trade. This is what makes a professional trader.
Step 3: reduce the position size twice
At this stage you already refreshed the trader’s log and had a break in trading. As soon as you start to feel that you are ready for trading again, it means it’s time to return to business. Now, instead of starting trading with your standard size of a position, you should think about reducing it twice. Even if there are still emotions from your previous unbelievably profitable trade, let them influence a smaller trade. Agreed?
However, we should admit that it is not easy to do it. In fact, a very few traders enter into the market with a half of their standard position after an extremely profitable trade. Nevertheless, many years ago this technique was considered to be incredibly efficient. Its application would be much more useful if you continue trading without having a rest, which was described in Step 2.
Although fulfilment of the third step is at your discretion, we still recommend you to seriously consider the issue of reducing your trading position after you received a big profit. It mostly refers to those traders who have difficulties in cooling down their emotions.
One of the most expensive mistakes traders make after receiving a big profit is that they believe that even if they lose this money they would stay breakeven and if they make more money – even better. This type of thinking results in a cycle of rises and falls, being an obstacle on the way to a stable growth of the trading capital.
The first thing you need to do after receiving a big profit is to insert it into the trader’s log. It is not important whether you use a notebook, electronic table or online service. Do it immediately in order to register and accept the achieved result.
You would also need to think about having a rest from trading. Such a break could last for a day or week but it may have a positive influence on your emotional state and protect you from premature trading decisions. The least of all you would wish to give the received profit back to the market in full due to the feeling of overconfidence.
As soon as you are ready to start trading again, think about reducing your standard position twice. It is especially important for those cases when your break after trading lasted for only a day or even less. If you reduce the position size, you will be able to protect yourself from the negative impact of the feeling of overconfidence, which may emerge after receiving a big profit.