How not to become a “landed passenger” in the financial market
Rule 1: limit your losses
Always put the “foot”. Translated from trading to a common language, this means that in any transaction, even before you do something, you must determine the maximum amount of loss. Even if you buy some stock or another asset (well, for example, gold) with investment objectives for a long term (5-10 years), then you still have to say to yourself: if this share or asset depreciates by more than 20 ( 30 or 50) percent, then you take and sell it and thus fix your loss. And here there is a very strict rule: the first “stop” is the most correct one. And so you can not expose the foot. How it works? Very simple.
Suppose you bought a share and decided that the maximum loss on it should not exceed 20%. The price goes against you (we remember – Baba Yaga is always against!) And you start to lose money. 5% … 10% … 15% … The price is slowly approaching the limit where your maximum allowable loss level is located. But very often there is such a situation: the price drops, say, by 22%, and then it turns around and goes up. And if you close your position (that is, sell the stock) when it reaches a loss level of 20%, then you will actually be deceived. You sold, and the stock price began to rise. It happens quite often on the market, and this situation even received a slightly offensive name – “disembarking passengers”.
You know about it and think: “Uh, no! It’s not easy to fool me! I do not want to be a “disembarked passenger” and therefore I will not sell a share when a loss of 20% is achieved. I’ll wait a little and in case of anything, I will sell it when my loss approaches, for example, 23%. ” Agree, in this case, the difference between the loss of 20% and 23% seems no longer so fundamental. But the price continues to go down and you continue to incur losses. Then you transfer your “stop” from 23% to 25%, then to 30%, and so on. And at some point you realize that you have already lost half of the total capital. And initially you were not going to do this, so it becomes terribly offensive and … I want to recoup! In no case can we do anything, and we have already spoken about this last time. You start kicking yourself and saying: “Well, what a fool I am! I was ready to lose only 20%, but in the end I lost 50%. ” And sometimes everything – if they started to play it all out! Therefore, always put the “foot” and remember: the first “stop” – the most correct !!!
Rule 2: Be consistent
It may seem to many that the main thing in trading on the stock exchange is predicting (understanding) where prices will go in the very near future. How to predict – with the help of technical analysis, with the help of observing the stars or the coffee grounds – it does not matter. The main thing is right. So, this is a profound error. Wins on the stock exchange is not the one who correctly guesses, but the one who can follow a strictly chosen strategy. And therefore, research shows that athletes and the military sell their products best on the stock exchange. Discipline, discipline and more discipline. Women, by the way, in general, also sell well. The only thing is that they do not take on too much risk, so they rarely achieve any outstanding results. So the main thing in stock trading is strict, I would even say – the strictest rules. In principle, you can even make decisions by tossing a coin (we buy an eagle, and tails we sell), but then you just have to fix the result very hard. If the price goes against you – immediately close the position, and if it goes in your direction – we hold it until it makes a profit. Hence the logical rule number 3.
Rule 3: let the profit flow
In fact, this rule should be put in second place. Since, for successful trading in financial markets, it is necessary to adhere to only two main rules: put “stops” and let profits flow. If you do not stick to them, then “merge” your account very quickly and you will hardly learn anything. If you follow only the first rule, then you will “merge” your account slowly and by the time it runs out of money, you may still learn something. But it is unlikely you will be able to earn in this mode. And only if you limit your losses and at the same time give profits to flow when prices go in your direction, only then will you earn.
Again, it seems that this is easier than ever. The price goes in your direction, you see how money arrives and comes to your account (after all, it’s damn nice, right?), And you just have to do nothing and continue to monitor the growing profit. But it only seems that everything is easy and simple. Now, if the price all the time grew without pauses and corrections, it would be easy. But after all, it goes up as if it is climbing along a windbreak – two steps up, one step – down. And suddenly down – not one step, but four?