At the edge of a loss
Trade, trade, trade. Everybody says trade. But what happens when you’re dealing with a loss? You haven’t let emotions overtake, but something like a new release that you missed causes turbulence in the market and suddenly changes its conditions to a reversed side of the direction you were trading. You are endangered with a loss. What do you do? Can you save your trade? Well, it seems that it is highly unlikely now. You start sweating and thinking about what you have done wrong.
In 2018, Sarah, an experienced trader, decided to buy shares of XYZ Company, a promising tech startup. She placed a buy order at $40 per share, hoping to sell within a few weeks for a decent profit. Before entering the trade, she also set a stop-loss order at $35, a price she deemed as her risk tolerance.
Unfortunately, unforeseen political events caused a market-wide downturn, and XYZ’s stock quickly plummeted. Sarah watched nervously as the price dropped below $38, then $37, edging closer to her stop-loss. While optimistic about XYZ’s long-term potential, she knew better than to let emotions cloud her judgment.
As the price hit $35, Sarah’s stop-loss order automatically triggered, selling her shares and limiting her loss to $5 per share. Though disappointed with the short-term outcome, she prevented a potentially bigger loss. Weeks later, XYZ continued its downward spiral, reaching a low of $25 per share. Sarah felt relieved that her stop-loss order had protected her from a much larger loss.
A stop order can always save the day. This tool sets a clear boundary, acting as a fail-safe that automatically triggers a sell order if the market takes an unexpected turn. It’s a strategic move in response to market uncertainties, safeguarding your investments from significant losses. Top of Form Sarah’s experience shows how important stop-loss orders are. While it might be tempting to tough it out during a market dip, she learned it’s smarter to protect yourself from major losses. In the end, the stop-loss order was like a money guard, helping Sarah keep her cash safe and continue trading.
In the volatile world of trading, it’s easy to get caught up in unrealistic ideas about risk management. However, a calculated approach, rooted in practical strategies, is essential to protect your capital. The protective stop, a pre-determined price level at which an order is automatically placed to sell a security if its price falls below that level, serves as your unseen guard, preventing losses from getting out of control. This simple yet powerful tool emphasizes the value of self-control and strategic risk management. Don’t let your trades become casualties of uncontrolled risk. Consider using protective stops in your own trading to limit your losses and safeguard your financial well-being.
Instead of diving headfirst into the market, gradually increase your involvement by making multiple entries. This methodical approach allows you to carefully manage your risk using techniques like stop orders and protective stops. These strategies act as your unseen protectors, ensuring your resilience in the face of market uncertainties.
When it comes to trading, there’s often a debate about going short. Some people believe that going long (buying) offers unlimited potential gains, while losses are limited to the stock’s price. On the other hand, going short (selling) is seen as having limited potential gains but unlimited potential losses. While this argument might make sense in theory, practical trading considerations and the use of stop orders to limit losses make it less convincing.
The Power of Leverage
One of the key advantages of short selling is the ability to leverage one’s capital. By utilizing borrowed funds, traders can potentially amplify their gains, making short selling an attractive strategy for those seeking to maximize profits. However, it’s crucial to exercise caution when employing leverage, as it can also magnify losses if the stock price moves against the trader’s position.
Short Selling as a Safer Option
From my perspective, going short can actually be a safer option than going long, especially when considering the speed at which stock prices tend to move. Stock prices tend to drop faster than they rise, so holding long positions can be riskier. Traders with short positions can benefit from quicker downward movements or slower upward movements, giving them more time to make corrections if needed.
Embracing Both Sides of the Market
It’s important for traders to be open to both long and short positions. Using a margin account (but being cautious with borrowed funds) is essential. Ignoring the short side of the market means missing out on opportunities and potentially making bad investments in declining markets. It’s wise to align your trading approach with the market direction, and sometimes short selling is necessary to achieve that.
At times, we encounter a minor setback in a position, and the fear creeps in that it might snowball into a significant loss. When faced with retracements (minor pullbacks or alterations in the direction of a financial instrument), instead of maintaining a patient watch, panic sets in. While there is a potential for a minor loss, the key is to exercise vigilance. The converse risk is when, having committed to being short-term traders, we allow a position to transform us into longer-term holders due to wishful thinking. In both these scenarios, the implementation of stops proves immensely beneficial. Essentially, each of us needs to determine the type of market activity that aligns with our temperament and information accessibility. Generally, there’s a tendency for traders to become impatient and shorten their time horizon. Yet, it is often more advantageous to cultivate patience. Unintentionally, we tend to compress the time frame, when, if done thoughtfully, it is typically advantageous to extend it.
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CMTrading is a regulated South African online trading broker that offers a diverse range of financial products and services. It specializes in granting access to trading in various markets, including forex, commodities, indices, and cryptocurrencies. CMTrading aims to provide a user-friendly trading experience by offering both beginner-friendly features and advanced trading tools for experienced traders. With a focus on customer support and education, CMTrading provides resources such as webinars, tutorials, and personalized assistance to help traders make informed decisions.