Trading financial assets can be enormously exciting and profitable, although the risks that this operation necessarily entails cannot be lost sight of. Next, we analyze some practical points that you should keep in mind when taking your first steps in the world of trading.
It is very important to recognize that there is no foolproof strategy that will make money all the time and in all kinds of market contexts. A first question is to have a realistic plan in terms of the percentage of successful operations and the profit and loss rates that you are going to set as a goal in your operation.
A first question is to have a realistic plan in terms of the percentage of successful operations and the profit and loss rates that you are going to set as a goal in your operation.
The success rate is the percentage of trades that are usually winners, while the percentage of profit and loss tells you how much you usually win or lose on average on each trade.
Of course, it is always desirable to have a high percentage of profit and also that the average profit is much higher than the average loss. However, this is rarely the case in practice. It can be a serious mistake to enter the world of trading with unrealistic expectations regarding the results that are possible to obtain since this usually leads us to take excessive risks.
It can be a serious mistake to enter the world of trading with unrealistic expectations regarding the results that are possible to obtain, since this usually leads us to take excessive risks.
Some strategies, such as spread selling with options, can be designed to obtain very high success rates, even making money on 90% of the operations. However, to obtain these success rates it is necessary to accept that the average gains are going to be much smaller than the average losses. In this class of strategies you make money in most trades, but when you face a losing trade it can be quite painful.
On the other hand, there are other types of strategies, such as betting on bullish price breaks, which present a directly opposite equation. In these cases, most trades generate small losses, but when you find a winning trade, the profits are usually of a much greater magnitude than the losses.
Both types of strategies can be perfectly viable and profitable in the long term. In addition, nothing prevents you from implementing different types of strategies with a varied profile of returns. However, the bottom line is that you need to understand in advance the success rate profile and profitability level of each strategy.
If you find a strategy that makes money most of the time, chances are that the gains will be small and the losses large. In contrast, other strategies lose in more than 60-70% of trades but offset the results with large profits when a winning trade occurs.
Understanding this balance between success rate and average profitability is critical, as the better you understand it, the greater your chances of success by basing your trades on realistic and achievable goals.
Another fundamental aspect is that of managing emotions, especially stress and anxiety problems that usually occur when the results are not as expected.
When we backtest a strategy by evaluating its historical returns, we really don’t have a good measure of the impact losses have on our emotions.
It is very different to evaluate past returns knowing that the operation had losses and then recovered to what we feel in real-time when we are facing losses and we have no guarantees that we can recover capital in the future.
Although it sounds counterintuitive, one of the worst situations a beginner trader can face is having an unusually successful stage when they are taking their first steps in the world of trading. Initial success can lead us to overconfidence and overestimate our risk tolerance level, risking larger amounts of money than is appropriate.
Sooner or later, all traders with a long market history face stages of unfavorable returns.
Sooner or later, all traders with a long market history face stages of unfavorable returns. This may be due to factors related to price trends in the markets or simply because all trading strategies alternate between favorable and unfavorable stages.
If we are risking too much money, not only a negative streak can generate considerable losses, but these types of events usually have very negative effects on the control of emotions and the discipline of the operator.
The novice trader, and especially when he suffers from overconfidence, is usually reluctant to take losses, trusting that the trend will reverse and he will be able to close the position at more favorable prices. This type of behavior can be enormously damaging, as small losses turn into large and potentially devastating losses when we do not have the discipline to apply risk control criteria.
The beginning trader, and especially when suffering from overconfidence, is often reluctant to take losses.
To avoid this problem, it is convenient to decide your risk levels before starting to trade and be clear that you are necessarily going to face negative stages in your trading career.
A good plan that establishes in advance how much money you are going to invest in each position and what is the maximum possible loss that you are going to take before closing the trade can make a huge difference in your results.
In short, the control of emotions and discipline are central aspects of success in the world of trading, and planning can be a fundamental tool in this regard.
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