Both traders and investors—regardless of their intelligence, knowledge or skills—lose money, for one reason or another. Losing is part of trading, and one must accept losses and learn from them. Making a valuable investment and learning how to handle it properly does not involve using only those strategies that are said to be functional in certain situations—it also involves assuming risks.

Traders are essentially risk managers; they risk money to make money. By definition, business is a risk itself, because you invest high amounts of money in order to start and run your business without any guarantee of profit or earnings. A business involves a chain of risks you assume in order to make a profit, all while remaining aware of the fact that chance may not be on your side, and hence, your reward will never be the one you expect.

There are some fundamental errors people make that increase their chances of loss:

Inappropriate Money Management Practices:

Most traders and investors do not fully comprehend or use the most appropriate money management techniques, so they don’t know when or when not to assume risk, nor how much money to risk on any given trade. A reasonable option you can approach is risking only 1% to 2% of your total account balance on any given trade, with a maximum of 10% on all of your open positions. This strategy will allow you to lose only 1% to 2% percent of 100%, so you will still have the rest of 99% to 98% percent to trade tomorrow in case you are wrong. This will ensure your survival in the markets, and give you control over your risk.

Most traders risk a small portion of their trading account, generally 1% to 2%. This will ensure that you have funds available to trade the next day.

1:2 Risk-to-Reward Ratio

Interestingly, even though most profitable traders end up having more losing trades than winning trades, they still are able to win money in the long run. This is because they know that capital preservation is an important factor to their success, and they use the correct risk-and-reward balance. In the first place, adopting a minimum 1:2 risk-to-reward ratio on a trade is an appropriate way to give yourself some breathing space. A 1:3 risk-to-reward ratio is the one you should strive for. This ratio involves risking a loss of a pip or $1 and seeking out at least three pips or $3 of potential profit. This strategy will allow you to be right one time out of three and still break-even.

Most traders will strive for a 1:3 risk reward ratio. Meaning you risk $1 to make $3. This strategy will allow you to be right one time out of three and still break even.

Low start-up capital

It has never been easier to start trading in the financial markets. Very low standard requirements have made trading accessible to everyone, making some people think that it is a get-rich-quick scheme. Most brokers do not have a minimum-deposit requirement, and people can start trading with a starting capital as low $10 if they so desire. But be careful with this—trading requires money in order to make money. Most serious new traders deposit $1,000 to $10,000. This widens your possibilities and lets you diversify your portfolio of trades. If you do decide to start smaller, always keep in mind that you should not risk more than 2% on any given trade. This is a good guide to have and will let you know your recommended contract size and risk.

A low starting capital could hinder your general performance.

Not enough Knowledge or Education

Some traders and investors lose money because they do not properly understand the actual market, and they basically close their eyes and fly blind, ignorant about what it is they are actually doing. We can safely conclude that those traders and investors who do not have enough education will always lose money, regardless of their intelligence or aptitudes.

Without proper education, experience and information, most traders are doomed to failure in the financial markets.

Following the “Crowd”

In addition, it is becoming popular for traders and investors to follow the same strategies as those of the “crowd,” meaning that these traders do not seek their own strategy and ideas. This is far beyond logic because authenticity is a virtue that matters enormously for successful traders. It is simple: No one is the same and different people will react differently to certain situations.

You may run into people (other traders) who are convinced that a certain company’s share is going to increase in price and that you should buy a few shares. You might just do that but still lose money, as you might have exited the trade early. On the other hand, the person who shared the info with you might have made money—he knew why he was in that trade, and those reasons may have prompted him to exit later. No one knows the direction of the markets, and only you have the final decision in your investments.

Learn from the professionals, but adopt your own ideas and strategies in your trading.

Trading without a Strategy

When people trade without a strategy, they are essentially betting instead of investing. Having no trading plan and trading on the go is a sure path to financial suicide. The best way to avoid this is by creating a comprehensive trading plan that will tell you exactly what to do, how to do it and when to do it, leaving all emotions aside.

Plan ahead. Create a comprehensive trading strategy to guide you.

No control over your emotions

Greed. Panic. Hope. Trading is a roller coaster of human emotions, and you must learn how to identify and control them. Greed, panic and hope are similar to wild animals that need to be tamed. Be honest with yourself about your emotions. Know when you are being greedy, and learn how to let some of your trading positions go.

Don´t let greed, panic, and hope cloud your judgment.

Not accepting your losses / Refusing to be wrong:

Humans are wired in all ways to be right, and being wrong is not well viewed in most cultures. Losing is part of trading. The sooner you realize this, the easier it will be to accept it. You cannot win money without losing part of it in the process.

Accept your losses and learn from them.

Bottom Line

Drawing the bottom line, every trader and investor should stick to a well-defined plan and use it even if the situation may be unfavorable and unpleasant. There is a lot to learn, and you cannot learn this in a few weeks or even months. Trading is a long-term business endeavor that requires constant learning and the gathering of daily information. Using good money management and risking the right amount of money are two of the most important aspects of trading that should be considered in order to achieve financial freedom.

Summary

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Most traders risk a small portion of their trading account, generally 1% to 2%. This will ensure that you have funds available to trade the next day.


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Most traders will strive for a 1:3 risk reward ratio. Meaning you risk $1 to make $3. This strategy will allow you to be right one time out of three and still break even.


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A low starting capital could hinder your general performance.


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Without proper education, experience and information, most traders are doomed to failure in the financial markets.


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Learn from the professionals, but adopt your own ideas and strategies in your trading.


P

Plan ahead. Create a comprehensive trading strategy to guide you.


P

Don´t let greed, panic, and hope cloud your judgment.


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Accept your losses and learn from them.

 

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