Almost everyday it seems I talk to a new trader asking me rather or not they should just suck it up and take a loss on some truly horrible position they entered hours before, or if they should wait for market conditions to improve. Honestly, I have a difficult time answering this question because I hardly ever end up in that position. It’s definitely not because every position I enter is a winner, but because I’m quick to exit the losers. Knowing when to exit a position isn’t an exact science and just about everyone has their own way of doing it, but the dire importance of mitigating risk deserves an entire article devoted to it.
Mitigating Risk is all We Do
Prediction accuracy studies indicate traders are actually even less accurate then weather forecasters, with around 50% prediction accuracy according to Forbes. So how does anyone make money on the markets? When you account for fees the markets might as well just be a casino– and the only one winning is the house, right? Well not exactly true, the secret of every profitable trader is the same secret of experienced poker players. You’ve got to know when to hold ’em and know when to fold ’em.
When it comes down to it, without stop-loss you are nothing. Statistically, that’s about the only difference markets have with casinos. Just imagine you’re at a roulette table. You’ve places your bets and your watching the ball roll around. As the table slows down, you can tell the ball is nowhere near your number. At a casino, it doesn’t matter that it looks bad– you’re stuck and you know your about to lose everything. But in the market, you can just stop the game! Imagine if you could stop the table from spinning, just hand over a predetermined amount to the house (say 1.5% of your bet), and save the rest for another round.– all of the sudden the odds of winning have turned in your favor!
This, my friends, is the secret to making money in the markets: it’s not so much about being right, but more about knowing when to exit!
Just take this recent period in the market for example. If you were trading on the Heikin Ashi indicator alone (which most people don’t), bought in on every one of these little bumps, and hit a basic stop of 1.5% you would have only lost 4.5% before you eventually hit a big 13% wave, giving you a net 8.5% profit. Meaning you would profit even if you were wrong three out of four times, and that you’ve still mitigated your positions against a possible massive swing downward!
I cannot emphasize this point enough.
It’s not about being right, and its not about making the most money you could have; it’s about effectively managing risk. Setting a stop at 1.5% is about as primitive as it gets, and I would challenge you to look back and find any period in the market where this wouldn’t work. Keep an eye on our Crypto-Forex 101 article for more advanced stop-loss techniques coming soon, but in the meantime, whenever you enter a position, consider what you’ve learned here!