We all know that to survive and thrive in the stock market, you need lots of skills, one of them being risk management. How often do you see yourself in the following situation?
🅰️ When you make money, you did not close your position to take profit, and all your profits go down the drain when the market drops.
🅱️ When you lose money, you did not have the discipline to cut your losses short and you see capital goes down from -10% ▶️ - 30% ▶️ -50% ▶️ (you get the picture).
Fellow traders, let us face it - the market is not always that kind to us, sometimes it can be brutally cruel especially when everything drops at the same time. We all have been there. This is where risk management plays an extremely important role to keep yourself in the game. Have you come across the phrase - 'Your First Loss Is Your Best Loss"?
Losing was never pleasant, but what is worst is having your capital whipped out if you do not mitigate your risk by using a proper stop loss management technique. A stop-loss specifies that a position is to be closed when it reaches a specific price (stop price). It is used with the intention to prevent further losses when the price of a stock drops. There is a variety of stop-loss management techniques:
Whatever stop-loss management techniques you use, you play by your own rules!. Remember - Your First Loss Is Your Best Loss". As trivial as it may sound, but it is often the most lethal to any trader's portfolio when taken lightly. Why do we emphasize this? For one simple reason, your capital must be protected at all costs. The following table will give you a better idea:
--------------- |------------------------------------
Loss Incured| Gain Required to Breakeven
--------------- |------------------------------------
-----10%----- |-------------11.1%---------------
-----15%----- |-------------17.7%---------------
-----20%----- |-------------25.0%---------------
-----25%----- |-------------33.3%---------------
-----30%----- |-------------42.9%---------------
-----35%----- |-------------53.9%---------------
-----40%----- |-------------66.7%---------------
-----45%----- |-------------81.8%---------------
-----50%----- |-------------100.0%--------------
-----60%----- |-------------150.0%--------------
-----70%----- |-------------233.3%--------------
Let's say you bought a stock at $1 and it gone down to $0.50, by then it has depreciated 50%. For it to return back to $1, you will need the stock to appreciate 100%!
The more the stock price depreciates, the more it needs to appreciate before returning to the price you bought. Imagine needing a 233.3% gains to recover a 70% drawdown? A big mountain to climb!
We hope you are convinced with the examples above and realized why it is vital to cut your losses short. But wait...we know what are you thinking. "Why can't I continue to hold or average down?" Unless you have unlimited capital, holding to a losing stock or average down will incur an opportunity cost. Time is money 💰 - you might not want to miss other better opportunities holding on to a losing position.
Your takeaway - your first loss is your best loss as it can prevent your losses to snowball. Your capital needs to be protected to keep yourself in the game. There is always something better waiting for you!
🅰️ When you make money, you did not close your position to take profit, and all your profits go down the drain when the market drops.
🅱️ When you lose money, you did not have the discipline to cut your losses short and you see capital goes down from -10% ▶️ - 30% ▶️ -50% ▶️ (you get the picture).
Fellow traders, let us face it - the market is not always that kind to us, sometimes it can be brutally cruel especially when everything drops at the same time. We all have been there. This is where risk management plays an extremely important role to keep yourself in the game. Have you come across the phrase - 'Your First Loss Is Your Best Loss"?
Losing was never pleasant, but what is worst is having your capital whipped out if you do not mitigate your risk by using a proper stop loss management technique. A stop-loss specifies that a position is to be closed when it reaches a specific price (stop price). It is used with the intention to prevent further losses when the price of a stock drops. There is a variety of stop-loss management techniques:
- Trailing Stop-loss
- Stop-loss at the previous swing low
- Stop-loss using technical indicators
Whatever stop-loss management techniques you use, you play by your own rules!. Remember - Your First Loss Is Your Best Loss". As trivial as it may sound, but it is often the most lethal to any trader's portfolio when taken lightly. Why do we emphasize this? For one simple reason, your capital must be protected at all costs. The following table will give you a better idea:
--------------- |------------------------------------
Loss Incured| Gain Required to Breakeven
--------------- |------------------------------------
-----10%----- |-------------11.1%---------------
-----15%----- |-------------17.7%---------------
-----20%----- |-------------25.0%---------------
-----25%----- |-------------33.3%---------------
-----30%----- |-------------42.9%---------------
-----35%----- |-------------53.9%---------------
-----40%----- |-------------66.7%---------------
-----45%----- |-------------81.8%---------------
-----50%----- |-------------100.0%--------------
-----60%----- |-------------150.0%--------------
-----70%----- |-------------233.3%--------------
Let's say you bought a stock at $1 and it gone down to $0.50, by then it has depreciated 50%. For it to return back to $1, you will need the stock to appreciate 100%!
The more the stock price depreciates, the more it needs to appreciate before returning to the price you bought. Imagine needing a 233.3% gains to recover a 70% drawdown? A big mountain to climb!
We hope you are convinced with the examples above and realized why it is vital to cut your losses short. But wait...we know what are you thinking. "Why can't I continue to hold or average down?" Unless you have unlimited capital, holding to a losing stock or average down will incur an opportunity cost. Time is money 💰 - you might not want to miss other better opportunities holding on to a losing position.
Your takeaway - your first loss is your best loss as it can prevent your losses to snowball. Your capital needs to be protected to keep yourself in the game. There is always something better waiting for you!