To all traders and investors, this is a very important steps for you if you want to be successful in stock market.
Most of the stock market participants will always look at the profit first or probability that will make profit from this trade or analysis.
If you are doing this, you are right but at the same time is the biggest mistake in trading. Although profit is our objective in stock market. But risk is much more important in order for us to achieve our profit objective.
No matter you are a trader or an investor, always follow Warren Buffett Rule #1, never lose money, and rule #2, always remember rule #1.
These rules thought us a very important and meaningful lesson. We have to access to the risk first, the losses that will incur with the trade or investment that we are moving in.
Always follow the steps below for your stock market entry decision :
- Identify a entry setup
- What are the risk that if you enter into this trade.
- Is the profit able to cover the potential losses? And also able to cover the next few trades losses that might happen?
- How do you maximize this trade? The position that you want to enter.
- For examples, the trade below we did for Bitcoin last week.
- Refer to the image above :
(1) is the first entry short sell position we enter and the red line is (1) first stop loss point.
The potential losses here are for the first entry is about 90 points = USD 6.30. But the potential profit that I am looking at is at least 2 times more than my potential losses. Which means 1 profit trade I can cover 2 losing trades. ( stop loss point will be different based on different trades.)
From here, I know that my potential losses is only USD 6.30, which I am ready to take up this losses. So I won't feel disappointed when I have to cut loss, because I expect to have a loss but not focus on expected profit, this is part of trading psychology training.
Then I place (2) entry for short selling with a lower position and adjust the (1) stop loss to lower level to secure the profit. With the adjusted stop loss, not only securing the profit of (1), it can also cover the losses for (2) and with additional profit if (2) hit the new stop loss. Therefore, the profit is guaranteed for this trade if (1) is in profit.
When a new high is form on the way down, the stop loss for both (1) & (2) will adjust lower to secure the profit.
With this adjustment, both entries are secure with profit.
From this trade you can see not only the profit that is secure but also risk management is properly executed.
However, it depends on the analysis that you are applying. So find out the best risk management to suit your analysis and trading method.
There are no 100% profit analysis, but with proper risk management you can achieve high profitability with an average probability.
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This blog is for educational purpose only. It is not and advice or recommendation to buy or sell financial instrument. Viewers and readers are responsible on your own trading decision. The author of this blog are not liable for any losses incur by any investment or trading.