Most investors concentrate on generating the best trading ideas. They focus on whether they should buy a new crypto, a hot bio-tech stock or the disruptive fin-tech that will change the industry. But when they put so much work into generating an idea, they get hooked on it and become reluctant to sell, when the trade goes against them. This is the so called endowment effect, the tendency to overvalue that you already own.
when you look at the most successful investors in the world, it does not matter, if they are are fundamental investors, systems traders, or currency and commodity speculators, and within all their different rule, they will always have one in common: Don’t lose money!
The single most important reason investors lose money is that they don’t cut their losses short. It is a curiosity of human nature that people still keep making the same mistake all over again because plenty of books and many experts offer this advice.
No matter how good your idea seems to be, a trade can always turn against you for unexpected and all the different reasons, even your original analysis was spot-on. Don’t fantasize about how a losing trade will work out in your favour. Focus on defining your worst-case scenario. Always look down before you look up. If you are right, the upside will take care of itself.
Your primary objective in trading should be to protect your principle capital. You do not want to wake up broke. After all, you have to be able to come back and fight another day.
Understand this most important rule and your trading performance will improve dramatically.
Sven Franssen