How to Profit By Keeping Losses Small

How to Profit By Keeping Losses Small

19 June 2019, 01:33
Isaac Wanasolo

The one thing that is guaranteed in anyone’s trading career is losses. Even the best traders in the world lose from time to time. What the best traders have in common however, is that they are very professional losers. Knowing how to lose properly is a must in a long and prosperous trading career. This theme is why am keen on developing strategies that embrace losses rather than alienate them. My main focus is to progressively perfect a professional style of losing trades, while ensuring that each trading cycle closes in profit. This can only be achieved by reducing risk and exposure using three important tools.

The first is the proper use of protective stop loss limit orders , the second is proper position sizing and the last, but maybe most important, tool is to keep losses small. This is the central tenet in my strategies and my automated trading systems. The WanaScalper MT4 & MT5 indicator is the first of these systems that has these three fundamentals of risk reduction embedded in its algorithms.

Stop loss limit orders

Stop loss orders to the trader are as important as the oxygen tank to the Astronaut in outer space.  Not having them, and knowing the proper way to use them is one-way ticket to annihilation - you are basically in big trouble. Stop loss orders in trading are meant to help limit your potential loss. There is more than one type of protective stop orders and it’s very important that you understand the difference between them.

Stop Market Orders (also known as Buy Limit or Sell Limit orders): This is an order to buy or sell once price trades a particular price. Once price reaches a pre-defined price, the order becomes a market order. This type of order can be used to enter or exit positions. Typically, this order is used for protection. While execution of this order is typically guaranteed, the price at which the order is executed is not guaranteed. This is because the order being triggered as a market order. The benefit with this order is that if price surpasses your stop price, the market order will take you out of the position. The negative is that if the market is moving fast, you may see some slippage and not get filled at the price you desire. This certainly is the ideal order if your goal is to protect yourself. As a trader, I always use this order for protection.

Stop Limit Orders (also known as Buy Stop or Sell Stop orders): This type of order combines the features of a stop order with the features of a limit order. Once a pre-defined stop price is reached, the stop limit order becomes a limit order to buy or sell at the limit price or better. The benefit of this order is that the trader has control over the price the order will execute at (it is “limited” to the stop price). The VERY negative factor with this order is that it does not in any way guarantee getting filled (protection) which is what most traders/investors want in a stop order. For example, if you bought a stock at $41.00 and have a sell stop limit at $40.50, and price reached $40.50 but there are no buyers, price will keep declining and your loss will grow with no protection. In short, if you are looking for more guaranteed protection, the stop market order is a much better choice. As a trader, I NEVER use this order for protection.

In forex trading terms like buy stop and buy limit, sell stop and sell limit, look confusing when you want to place a pending order. Sometimes you wonder why MetaTrader 4 or MT4 platform doesn’t accept your pending order requests when you choose one of these terms. First, please let me explain what buy stop, buy limit, sell stop and sell limit mean and what is the difference between these options. Then I will explain how to choose these options on MT4, and how this platform can easily prevent you from any confusion.

What is the difference between Buy Stop and a Buy Limit?

A buy stop is a buy pending order above the market price. For example, the GBP/USD's current price is 1.25740 and you want to buy it if the price goes higher and reaches 1.2700. You will therefore have to set a buy stop at 1.2700. If you place a buy pending order below the market price, that order will be known as a "Buy Limit" order. For example GBP/USD's current price is 1.25740 and you want to buy it if the price goes lower and reaches 1.25200. You will therefore have to set your a buy limit order at 1.25200.

What is the difference between a Sell Stop and a Sell Limit?

A Sell Limit is a sell pending order that you place above the market price. For example, the EUR/USD current price is 1.0495. And, you want to sell EUR/USD if the price goes higher and reaches 1.0515. You will therefore, you have to set a sell limit order at 1.0515. If you place a sell pending order below the market price, that order is known as “Sell Stop”. For example, EUR/USD’s current price is 1.0495. And, you want to sell EUR/USD if the price goes lower and reaches 1.0480. Therefore, you have to set a sell stop order at 1.0480. One important thing to note is that if you want to plate a Sell Limit oder, the price you enter has to be higher than the current market price and if you want to set a Sell Stop oder, the price has to be lower than the current market price. If you enter the price wrongly, you will receive an “Invalid S/L or T/P” error.

Keeping Losses Small

I struggled for two years as a losing trader because i was searching for a holy grail system that does not make any losses and i failed miserably as i jumped from system to system. Knowing how to minimize risk is the most important thing in trading. There are really only four possible outcomes to a trade or investment: A big win, a small win, a small loss, or a big loss. But if we manage to eliminate the big loss, we can live very comfortably with the other three. I reckon the best companion for this trading approach is the WanaScalper MT4 & MT5 indicator.

As humans, we always want to be right; we hate being wrong. You can’t think this way in the world of trading and investing because the truth is, you will have losses. Embrace those losses as a part of your profitable strategy and keep them small. I have losing trades sometimes but I really don’t care. On the emotion side of trading, I no longer feel emotionally attached to trades whether they turn out as losers or winners because after all, I am not judging my performance based on the outcome of one or two trades but rather the result of all trades taken in a given period time, which could be weekly or monthly. My aim is to consistently execute a profitable trading plan over and over and over.

Hope you picked up something useful.

Enjoy your trading.

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