Newbies in the stock market face a recurring problem: how to handle losses. It’s not advisable to begin trading unless you’ve gained an astute knowledge of the fundamentals, and even after you do, you may still find that you’re wet behind the ears. This article addresses how you can manage trading losses as a newbie investor. We also explore some trading techniques that can help mitigate unprecedented losses.
Why Your Trading Strategy is Failing
The most common reason why most trading strategies fail is that investors utilize random strategies without fully understanding the principles that influence market prices. Without this knowledge, even though you get lucky on a few trades, this success will be short-lived. When trading, you must determine the essence of each loss, whether it’s due to a corporate event or a bad macro strategy. Resilience drives the most successful traders, and it’s a trait you must also employ in your trading journey.
Understanding Factors That Influence the Stock Market
Before you begin to take trades, it’s essential to understand the underlying factors that make the market move the way it does. Even the best trading strategies will fail in light of these underlying factors if you’re not vigilant enough. Stay in tune with current trends before you analyze or decide on a trading strategy. Some of the main factors that affect market prices include:
✓ Worldwide economic status
✓ Principles of demand and supply
✓ Political structure
✓ Natural disasters
✓ Inflation rates/National fiscal performance
Choosing When to Close on A Position
Experienced investors know a trade can go downhill in a split second, even if it has been raking in sweet rewards beforehand. The most successful traders will take profit (TP) once their target milestone has been reached and reassess the market before making another trade.
If things are going sideways, your stop loss (SL) feature will also come in handy to prevent unnecessary losses, even when you’re not actively monitoring the trade. Here are a few more factors to consider before closing a trade:
One of the benefits of understanding your basics is that it instills more confidence in your decisions. If you’ve carefully analyzed the ability of an asset to generate cash alongside the other factors that influence the market, you won’t run scared when it looks like the trade isn’t going the way you want. Again, even if your business model is wrong, the SL feature will prevent you from unchecked losses.
Price Recovery Assessment:
When a trade declines, you mustn’t close your position in a panic. There are many instances where your price charts show a decline but will still go on to make a profit. However, if you’re a long-term investor, watch out for the dead cat bounce. You can use the short window of price reversal to close your trade and reassess the situation before moving forward.
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