Before you trade or buy any investment instrument you should determine how much capital you are willing to risk on that particular trade. Contrary to prevailing opinions –
Your first goal should be-
- Not losing money (as opposed to trying to make money).
Your second goal –
- Avoid getting into a catastrophic loss situation, where you let a small loss turn into a big loss.
Most fatal airline accidents start off as a small mistake by the pilot, but then instead of correcting the initial mistake, somehow the judgment of the crew or the captain gets crowded and that leads to another small error. Over a short period of time, what started off as a small mistake gets compounded to the point where catastrophe hits. So my simple advice is that, if you put on a trade that begins to go bad, don’t compound the initial mistake with yet another mistake by increasing position size, or wishing for the market to make you whole. You are responsible for putting on the trade and you should be responsible for taking the trade off, even for a loss. No matter how small or big the mistake is, you made the initial decision to put on the trade make the next logical decision is to close it or insure it, and don’t ever wish for a miracle.
If you can manage your losses to a disciplined 2% or less of your investment capital on all trades, then you have a leg up on the competition. While losing money is not fun, you have to treat the losses as part of the cost of doing business. Never let a small loss turn into a big loss. Big losses typically start small and compound, it is always a lot easier to take a small loss initially than a big loss. Capital Preservation – preserving your trading capital – should be your top priority, period. Anything short of that and you are basically gambling.
Income Trader
