CFD trading requires its traders to predict the right direction of prices. These decisions should be for the greater good and generate profit as much as they can. With this goal in mind, traders tend to think that they must be able to create the right decisions at all times. This is ultimately wrong. You can read all information you need online on how to trade, watch videos, and experience paper losses during demo accounts. But it is still not enough for you to avoid losses.
You may not be able to stop loss completely, but here are the things that you can keep in mind to minimize the losses you incur.
Importance of Stop Loss
- As its name suggests, stop loss helps you stop loss. You need stop-loss whether you trade or invest. You might start with successful trades in a row because of your almost-perfect strategy but can still encounter painful losses in the long run. That’s when stop loss becomes handy.
- The most common mistake in trading is traders not being wary of the fast movement of the market. Traders should know when to stop to cut the losses. Experienced traders and even coaches will recommend keeping your losses at the minimum as you run for profits. When the time comes and your trades go against you, you must be prepared to cut losses. Make it quick and disciplined.
- Accept the reality that you are on the wrong side of trading if you experience a string of losses. If this happens, do not hesitate to close your losing positions. Do not risk too much by convincing yourself that your trades are correct and well-planned. Accept the reality and get over it.
- Did you know that the most successful traders share a single, remarkable ability? It is to get out and abandon a losing position quickly and without any hesitation. Most of the time, newbies tend to move further the stop levels fearing that they will be out of the market at high or low.
- Taking a loss often will not offer you any problems. Don’t hesitate to sell your losing position and move on. Remember that the financial market changes from time to time. Even the most successful traders also get wrong.
- You need a trading plan to succeed in trading. But there’s no denying that stop loss is a very big help. Be disciplined and use stop-loss if the market calls for it. Do not let losing position average down. If you see that the position is getting against you, leave it to cut the losses. Holding on to your losing position will only result in an opportunity cost since the capital will be tied up into the losing trades. This means that you will miss better opportunities.
- Drawdowns must be limited to only 20 to 25%. Once the percentage exceeds, the trades will be more difficult, and most likely, you won’t recover. For some time, you can stop trading and re-evaluate the market for the string of losses that you have encountered. Come back again with a fresh mind and a most effective trading plan.