Capital is King

[Soultrader 12]

A new trader enters the markets and will usually blow out in a few months. He takes wild risks, huge losses, and trades emotionally just to get his money back. But trading recklessly after a loss is a sure way to lose. Here's why:

• If you lose 10% of your capital you must gain 11% to break even.
  
• If you lose 20% of your capital you must gain 25% to break even.
  
• If you lose 40% of your capital you must gain 67% to break even.
  
• If you lose 50% of your capital you must gain 100% to break even.

Get the picture? If you risk 2% on a $10,000 account you need to lose 50 times in a row to wipe out your account. If you risk 10% on a $10,000 account, you are done after 10 losses.

 

Taking a Loss

 

A new trader in a losing position has the hardest time taking the loss and admitting he is wrong. Are you in the markets to be right? Or are you in the markets to make money? When new traders can no longer take the pain and close their position, the markets will usually reverse on them. This leads to more frustration and emotions which leads to suicidal trading.

 

Do not let a small loss turn into a disaster. Live to fight another day. The more trades you take and build experience, you will have a chance developing into a successful trader. It is estimated that 1000 trades is needed in order to gain a grasp of what you are doing. (for day traders)

 

Control your emotions and trade with patience. All you need is to pull the trigger in 2-3 good opportunities. Spend the rest of the time watching a movie or analyzing the markets.