Overcome losses expanding trade expectations

There is nothing certain in life. The same goes for trading. Some trades will be profitable when traders trade, while others will inevitably be loss-making. No system and no strategy can guarantee permanent profitable trading. Losses are inevitable. What is not unavoidable is to find a way to overcome them.

What is almost certain is that even the most experienced traders can sometimes not overcome their trade losses. This happens because everyone is human, and therefore no matter how expert they become or how fantastic their past performance is, they often forget that the source of all evil is their failure to recognize and accept that the risk of loss is always there.

Sometimes the worst thing that can happen to new traders entering the markets is that their first trades have very good returns. If this happens, then there is a danger that they will believe that they can get rich easily and quickly.

In reality, however, it is more likely that they have achieved these returns because they have taken on too much risk for their current portfolio size. So winning trades will, in effect, reward them for bad behaviour and give them a false sense of security, that they know everything there is to know about trading and that they are ultimately invincible.

But markets demand respect as they are living entities with ups and downs, and if market traders are caught unprepared, they will be punished brutally. Obviously, market traders can make profits beyond their wildest dreams, but they must first learn that sometimes they will lose money, and that's when they shouldn't get discouraged. But to do this, they must always be prepared to follow specific guidelines.

The core of market traders' thinking must revolve around the saying: "Cut your losses fast and let the profits run". This is the only way for traders not to get discouraged, but to do this, they must maintain their discipline by following the rules below.

The first rule is for market traders to try to find trading strategies that will meet the following three criteria:

• Trading strategies will match their personality.

• Trading strategies will be consistent with their experience level.

• Traders will feel comfortable with these strategies.

The second thing market traders should do is focus on "paper trading". That is, to test their preferred trading system on paper in order to calculate the PNL ratio. This ratio will need to be combined with a money management system. That is how they will find how many dollars they win for every dollar they lose and their profit-to-loss ratio.

The next thing they will need to do is always use a stop-loss exit to reduce their losses, basing their calculation on market dynamics rather than an arbitrary dollar amount. Regarding the activation of stop losses, market traders need to have developed their psychology and self-confidence to stick to their exits consistently.

Furthermore, an essential rule of thumb is determining the correct trade size about the current size of the trader's portfolio. Each position should never exceed a risk of more than 2% of the portfolio value. This should be an inviolable rule when trading in the markets.

Also, traders will need to keep records to have a daily analysis of their profit/loss performance so they will know firsthand when their system is failing due to a change in the market cycle or a change in their psychology.

If the market trader's strategy fails by a certain percentage, which they must have determined in their money management plan, they must stop trading with live money and return to paper trading to determine the cause of the failure. If the trading strategies are proven to be profitable again after testing and analysis on paper, then traders can return to the market with a live cash account.

On the road to profitable trades and reducing disappointment when failures occur, market traders must agree that they will need to follow the above guidelines. Otherwise, they risk being trapped in an endless cycle of disappointment and excitement, leading to a failure to overcome their losses when they come and, thus, to a failure to expand their trade expectations. What is needed is to follow the rules so that they quickly leave behind the losses and focus on good behaviour.