You might not see this as a rule, but it is another quick reference that would give you perspective. The previous ed post, linked below, gave a quick reference for perspective on winnings and a basis for strategies around risks. This does the same for losing. Compounding even got Einstein interested. The subtle point reading the two eds together is the value of quickly knowing where you are always, knowing where you can logically go and planning for multiple eventualities with a proactive response to them. In my early years I could not understand how somebody could lose a whole account and then learned this and how it is linked to emotions and even the infamous “death by a thousand cuts” of risk aware traders. So again, do not be blinded by the simplicity of what follows, please be patient and read through it and think about it.
Consider you are trading your full account at $100 at a price of $100. Things go wrong for some or other reason and you lose 50% ($50). Now you are at 50% and need to make 100% on that ($50) to get back to break even (price $100). Straight forward, but not. There is a parabola behind this, not a straight line, that wrecks many accounts and businesses at speed. Look at the right-hand column getting very bad, very quickly.
I call it “getting wrecked parabolically”, because the next loss, often made by a trader on tilt, changes the targets in a hyperbolic fashion. Please search for this on the net, but this compounds the difficulty of getting back exponentially as you could see it as putting a next level on top of your previous “parabolically wrecked” equation. This compounding makes the break-even horizon quickly become a virtual impossibility. I would go as far as saying this is a main reason for newer brick and mortar businesses going bust. Some newer traders, before finding solid ground, then adds yet another layer on top via leveraged trading as they are told that this is “only for those who know what they are doing” but they do not yet know what that looks like.
Why, when this is clear, do so many new traders have to fall into this trap, even multiple times? It cannot be only blamed on the trader’s approach to trading, but I think it is also because of the way trading is presented to people, forming their lethally dangerous approaches. I hope I added value.
My conclusion: Once you are down, and be ready as it will happen, it becomes layer by layer more and more important to have an edge and calmly trade yourself, in small increments, out of the hole. Very important to me: Please leave a like if you think others could find benefit in this, please comment if you can add to it, and follow if you think this is leading somewhere that you would like to know about.
Consider you are trading your full account at $100 at a price of $100. Things go wrong for some or other reason and you lose 50% ($50). Now you are at 50% and need to make 100% on that ($50) to get back to break even (price $100). Straight forward, but not. There is a parabola behind this, not a straight line, that wrecks many accounts and businesses at speed. Look at the right-hand column getting very bad, very quickly.
I call it “getting wrecked parabolically”, because the next loss, often made by a trader on tilt, changes the targets in a hyperbolic fashion. Please search for this on the net, but this compounds the difficulty of getting back exponentially as you could see it as putting a next level on top of your previous “parabolically wrecked” equation. This compounding makes the break-even horizon quickly become a virtual impossibility. I would go as far as saying this is a main reason for newer brick and mortar businesses going bust. Some newer traders, before finding solid ground, then adds yet another layer on top via leveraged trading as they are told that this is “only for those who know what they are doing” but they do not yet know what that looks like.
Why, when this is clear, do so many new traders have to fall into this trap, even multiple times? It cannot be only blamed on the trader’s approach to trading, but I think it is also because of the way trading is presented to people, forming their lethally dangerous approaches. I hope I added value.
My conclusion: Once you are down, and be ready as it will happen, it becomes layer by layer more and more important to have an edge and calmly trade yourself, in small increments, out of the hole. Very important to me: Please leave a like if you think others could find benefit in this, please comment if you can add to it, and follow if you think this is leading somewhere that you would like to know about.
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My previous trading forecast
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My next ed post
