How to manage losses and profits in trading

Profits always take care of themselves, but losses never settle automatically. - Jesse Livermore

Loss is a prerequisite for profit

The essence of trading profitably is to capture market trends. Trading techniques are largely trend judgment techniques. Even in volatile markets, so-called "reversal" trades are often based on identifying false breakouts, setting small stops and pursuing local trends with high profit-to-loss ratios.

The key to trend trading is to know the profit-loss ratio. To establish a good profit-loss ratio, you must first clarify the position and magnitude of the stop loss - which means that a successful trade starts with effective management of losses. Only by knowing what the worst case scenario is can a trader really make a decision. After a decision is made, even if the result is a loss, it is the right trade as long as it is planned. At this point,Losses are also a correct part of trading logic.

Van Tharp once pointed out that the charm of trading lies precisely in the possibility of losing money.The core purpose of trading is not to make a single profit, but to adhere to the established trading system.In the framework of the system, a misjudgment of the market is not the same as a real mistake. A single loss represents the loss of an individual position, not the failure of the entire trade. Losses are an unavoidable part of the trading process, and traders need to learn to accept them.

The real failure often occurs when trading gets out of control, that is, allowing small losses to gradually evolve into unbearable large losses.

Losses must be accurate

There is a thought-provoking quote from the Rockhawk Trading Act:

The biggest secret to growing a trading account is to avoid runaway losses.

Compound interest is the cornerstone of a trader's success, and a big drawdown in net worth is the biggest obstacle to compound interest growth. Under the protection of a viable trading system, the main reason for deep account drawdowns is often those losses that are not stopped in time. The same principle applies in markets such as stocks and IG Forex.

Traders must learn how to limit losses before they can start making steady profits. Failure to see losses properly usually means a reluctance to accept the reality of losses. And this resistance often leads to ever-widening losses.

Once a trade is proven wrong by the market, it must be admitted decisively and stop the loss immediately. The trick to winning a trade is not to let the loss expand too much when you lose money. If you can deal with the loss location decisively, the profit will naturally accumulate gradually. This is especially important for traders involved in volatile markets such as IG Forex.

Losses can occur, but they must be manageable and accurate.

Profit as "confused" as possible

This principle has been emphasized in many trading books.

Cut off losses and let profits run!

Cut loss short, let profit run!

It is often impossible to predict how much a trade will turn out to be profitable. After controlling the individual risks, it is better to leave the rest to the market. Trend traders catch the trend like anglers catch a big fish. If you rush to profit too early, it is like catching only the head of the fish and letting the fish go. When the trend is favorable, you should make the best use of it as much as possible, and unless the trend clearly ends or reverses, let the profit increase naturally. Michael Magas said: "If you can't make the most of the winning trade and make as much profit as possible, what can be used to make up for the losing trade?" In IG foreign exchange trading, following this philosophy helps to capture the larger trend band.

Livermore has a more accurate interpretation of this:

Let the profit run, and you ride it along.

The core of the problem can be summed up in five words: stop loss, not stop profit. In the face of profit, you might as well be "confused" and let the market determine the final margin of profit.