Never try to win back a lost trade
Reading time: 2-4 minutes (622 words)
Most traders only think about one thing:
“Making as much money as possible in a short period of time”
Because making money is the one and only reason to get into trading or investing, people make many mistakes. The biggest emotional mistakes you can make are:
- Investing with money you can’t lose
- Investing with money you need in the future
- Trying to win back lost trades
- Using leverage products as a beginner
There is no fixed amount of money you need to have before you can invest. Although some assets require an x amount of money before you can buy them. How much money you need also depends on what kind of investor you want to be. If you don’t have any money to invest, then simply don’t invest. If you do, you will get emotional sooner or later and make mistakes. Even if you see the biggest opportunity in your life, you simply can't invest the money you currently need. Because no matter how big the opportunity is, you will never have a 100% guarantee that it will be a success. That's why it’s very important to first apply the basic rules of money management to your finances. If you apply these rules, you will always end up with money you can spend on whatever you want.
If you use the money you need right now, you'll be emotionally attached to your trades. If you lose a trade, you will get a very strong emotional reaction and you need to win back that trade. If not, you can't pay your bills anymore. You will desperately try to win back your money. But what most traders don't realise is that you need to win back even more money than you lost to get break even.
If you started with $1000 and lost 50% in a trade gone bad, how much % do you need to win back to get break even (back to $1000)?
Reward: +10 XP 0 0 0
Let's assume you have $2000 and take a trading position for 50% ($1000):
- You put $1000 in one trade and lose the trade
- You lost 50% of your initial stack ($1000 from the initial $2000)
- That does not mean you need to win back 50% to get break even
- If you have $2000 and lost $1000 you have $1000 left
- If you win back 50% of $1000 you only get $500. To get break even you need to gain 100%!
| If you lose: | You need to gain for break even: |
| 10% | 11.11% |
| 20% | 25.00% |
| 30% | 42.86% |
| 40% | 66.67% |
| 50% | 100% |
| 75% | 300% |
| 90% | 900% |
Yes you read that right. You need to gain 900% if your asset is down 90%. You can imagine that things will go bad very fast if you try to win back money you lost. You simply need to gain much more after a losing trade to get break even. That’s why you should never get emotionally attached to a trade. If you lose a trade:
- Forget about it
- Stick to your plan
- Don’t be greedy by trying to win back the money you lost
And the same thing applies if you are in a winning trade:
- Stick to your plan
- Don’t be greedy, take your profits
You can only forget about lost trades if the lost money is part of your trading plan. There is not a single strategy out there that won't lose money. Trading is all about managing risk, not avoiding it. You already know that you'll lose one or more trades. It's simply part of the plan. Another part of the plan is using the right amount of risk management. If you risk to much money each trade your account will reach zero within a few trades. It's recommended to risk a maximum of 1% of your account balance each trade. This way, you need to lose 100 trades before you bust your account.