1. Cut Losses Quickly
This is rule no. 1 for a good reason. We all want to make money in the markets but you have to understand how to manage your losses first. It’s the first rule because it’s the most important and also the hardest to follow.
The greatest threat to your ability to continue trading is a big loss. A big loss can completely disrupt your mental process or even wipe you completely out. With a big loss you lose your most important trading tool: your capital.
In a situation where the big majority of all private traders lose, you have to act differently: start by eliminating big losses!
There will always be another trade. Not just one trade will ever make you rich. But one trade can blow up your account. If you leverage or short sell, you can actually lose more than your entire account and you might even go into debt.
2. Stay in the game
When you’re learning to trade, your top priority is to not go broke. So many traders get into trading only to blow up their accounts within 1 year or 2. Don’t follow in the footsteps of those traders. You have to learn to never take a big loss. Avoid big losses by taking smaller ones! You have to get out of bad trades quickly. Learn to trade smart. Look at the big picture.
This is a marathon, not a sprint. Prepare for the long run. It’s all about managing risk/reward. Trade like a retired trader and only get into the game for the very best opportunities, where reward is higher than the risk. If one of those trades doesn’t go according to plan, get out and protect your investment capital from a big or total loss.
3. Focus on Process Before Profits
Don’t judge your trades on profit or loss. Judge your trades on whether you stuck to your process and trade plan. You must have a trading plan for every trade you make and that has to include an exit. So, if a trade doesn’t go according to plan, where will you get out? Know your point of maximum pain, accept your loss, and look at the next opportunity that is in your favour.
Losses are part of every successful trader’s process. A lot of traders never learn from their losses. It’s the primary reason 90% of people fail at trading.
Nobody is perfect! Treat trading like any other business. Business comse with ups and downs, expenses and income, wins and losses. Trading is no different. Think of losses as an expense that all traders pay. No trader has a perfect record. They all lose sometimes. But you can learn to keep your losses small.