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Let us face it, the basic reason why people trade is to make profits. Our main goal is to engage the financial markets and end up making money by doing so.
Sadly, many traders are too obsessed with making money that they tend to ignore safety of their trading capital. They think of how much they can make per day, per week or per month, without thinking about how they can keep their capital safe in worst-case scenarios.
Yes, worst-case scenarios do happen, and ironically, they are the best-case scenarios for certain traders. These are some recent examples of such scenarios.
Subprime mortgage crisis of 2007 – 2010
Flash crash of May 2010
Major earthquake and subsequent nuclear fallout in Japan, 2011
Unprecedented volatility in CHF pairs, 2015
Unusual, transitory accelerated bear markets of 2020, which was followed by strong bullish rage. 2020
And the list can continue.
Each of these scenarios resulted in colossal gains for some traders as well as massive losses for some. It is known that the market has symmetry; when you go in one direction and make money, those who go in your opposite direction will see negativity in their positions. For instance, when the unprecedented volatility happened on all CHF pairs in 2015 (the reasons behind that are beyond the scope of this short article), I know a trader who just funded his account with 1000 USD that week and the capital went kaput. I also know another female trader who was having less than 30,000 USD in her account, only for her to wake up and see over 800,000 USD equity in her account!
That brings us to the most crucial thing, I know traders who survived these scenarios or even made huge gains from them. The reason is because they took the safety of their funds seriously.
When you have money in your account, you can trade and expect gains. However, if the money is gone, what would you use to make additional speculation? Nothing. The only option you will have is to fund the account again, so that you can resume trading.
Profit and risk
I do not have a guarantee that the next trade will win, or lose. There is no guarantee that worst-case scenarios cannot happen anytime, which may have effects on my trading capital. What someone calls a bad scenario may be a good scenario for you. What brings losses to others is what bring profits to you.
But I have assurance that once I take the safety of my account seriously and I apply prudent risk control techniques to my trading, bad scenarios cannot have adverse effects on me, and good scenarios will always bring satisfactory results.
If I plan to gain 500 USD on a single day, having only 2000 USD in my account, would I want to think of what could happen, should the market move against me? Would I want to accept 25% loss on a single trade? If I cannot accept 25% loss on that trade, then I need to reduce the amount at stake significantly further.
In reality I risk 2% or less on each trade.
The safety of your account is the primary thing: profits are only secondary. Preserve your account with risk management and profits will come naturally. Just ensure that you survive in the markets for the longer-term and you will have testimonies to share. You will have profits to show as a result of your victory.
No matter how good or skilled or experienced we are, we cannot avoid occasional losses, and that is what makes trading interesting as well as challenging. The aim of every triumphant trader is thus to have losses that are smaller than profits. If I make a total losses of 3500 USD in a month, and I also make a total profits of 8000 USD in the same month, then that is a profitable month for me.
Really, if you keep your money safe in the face of the vagaries of the market, you will eventually end up being richer than you currently are.
NB: Watch out for an article that reveals the single most important factor that will guarantee consistent profits, coming soon.
Source: https://learn2.trade/
