When taking their first trading steps, most traders open a demo account and trade on a test platform. And during the first few days, their balance is somewhat likely to go up. Perhaps that gives them a false sense of trading aptitude, and they immediately go on and activate a live account.
However, that’s when they lose a ton of money instead. So how do they go from being relatively successful to losing everything? Surely things can’t change that much in just a few short days.
And in truth, nothing really changes. It’s just how you perceive trading on a test platform compared to real trading. In real trading, you can’t just watch the numbers go up; to get your money, you need to end your trading position.
Knowing when to do so is difficult, especially when greed takes the wheel of our minds. Seeing a company do well has us thinking we can squeeze an extra bit of money out of our position. However, that’s where the value suddenly goes down, and we lose a ton of money on what could’ve been an excellent position.
It’s nothing to be ashamed of, as we’d wager that every single longtime trader has had the same experience. However, learning how to avoid falling into that trap is perhaps the most important step in becoming a successful investor or trader.
Also, keep in mind that this is a guide aimed at relative beginners. Once you’re more experienced, you can rely on your intuition and approach positions on a case-by-case basis. Here, we’re interested in setting a few rules of thumb and general approaches.
How Not To Lose Your Money
The first thing we should mention here is the fire-and-forget method. It consists of taking a relatively large amount of money, investing it in an index or an ETF, and forgetting about it for a while. Here, you’re relying on cumulative interest to bring you profits over a significant time period.
Generally, that’s the safest and most profitable way to invest for the majority of the population. However, the gains are very incremental, and that’s not what most investors are looking for.
A second approach is to set take wins and stop losses. You can set them for either a specific value or a percentage of the current position. That way, you eliminate the impact of greed on your trades purely from a technical standpoint. If you resist the urge to move your buying and selling points, you’ll always get out as planned. The disadvantage is that a fixed point can lock you out from massive jumps, preventing any huge gains.
Another method worth mentioning is following well-known traders. However, that doesn’t always work since they have large trading budgets and they rely on their entire portfolio instead of single positions.
The last thing we want to mention is a more active approach. You can trade without take wins, but set stop losses. Then, every day, you can check your positions and set new stop losses based on how they are doing. This tactic may get risky depending on how you set your stop losses, but it leaves room for much higher profits than the others.
