Night Reading | 8 Things to Keep in Mind When Trading: Surprisingly, Profit Isn't at the Top
Jin10 16/05/2024 23:50

1. Stop loss is always the first priority

Every business has risks, just like opportunities for profit, it is a two-sided issue. It should be said that the size of trading risk ultimately depends on one's control, and the main means of control is to stop loss in a timely manner. If you set a predetermined stop loss level when entering the market, set a stop loss point, and issue a stop loss order in advance, if you are long, surrender when it falls below the support point; if you are short, exit when it rises above the resistance line, then the risk can be controlled in your hands. Small investors should always prioritize resolute stop loss in order to minimize risks.

One of the most important principles of stop loss is "not afraid to cut losses, afraid of dragging." Since everyone has the opportunity to make mistakes in market analysis, the difference between smart and foolish people lies in smart people being good at cutting losses decisively; foolish people are often dragged down by the market. Small investors must have a concept of stop loss without hesitation, and act decisively in trading, winning or withdrawing. They can seek high profits without taking high risks.

2. Make profits run

When losing, set a limit; when winning, make sure to win enough. This is the unbeatable rule for small investors to win in the trading market. Successful traders emphasize "stability," "accuracy," and "aggressiveness." The meaning of "aggressiveness" is to never let go of profit opportunities and strive to expand the gains to achieve a big victory. By achieving a big victory, it can compensate for inevitable small losses and keep the overall profit. There must be sufficient reasons to close out profitable positions, and as long as there are no reversal signals, hold on and do not let go, just as you need to carefully study the timing of entering the market, you also need to carefully select the price when closing out.

The market develops in a wave-like pattern, so we need to analyze the trajectory of the waves and find where the peaks and troughs are. If we are long at the bottom of a wave and the uptrend has just begun, why hurry to close out when we haven't even reached the top of the wave, let alone the middle point? Since the current position is in line with the overall trend and not going against it, let it run, and make a profit.

3. Only what is put into the pocket is yours

In daily trading, the most frustrating thing is when you initially enter a trade in the right direction, even had a considerable floating profit, but then the market reverses, and the cooked duck flies away. What should have been a profitable trade turns into a loss when closing out, which is a major psychological blow for small investors. Small investors trade to make money, and only what is put into the pocket is theirs.

In the capital market, until a trade is closed out, any price difference profit shown belongs to floating profit. Only by seizing opportunities and closing out in a timely manner can floating profit turn into realized profit, which is considered putting money into one's pocket. Regardless of how big the up or down trend is, it develops in a wave-like pattern, not rising straight to the top or falling straight to the bottom. There will always be a pullback after a rise, and a consolidation after a fall. When trading within the waves, when you estimate that you have reached your profit target, it is time to close out and put the money into your pocket. Otherwise, if the trend reverses, the floating profit will shrink or even disappear.

4. Profitable, that is, closing position

When small investors encounter such a market, they are usually pleasantly surprised, sometimes just entering the market and encountering a sudden big market movement, suddenly seeing a large floating profit in their positions. When encountering this windfall, an important principle is to immediately close the position and secure the profit.

The reason is easy to explain. For example, with a sudden large increase, those who are fortunate enough to make more than double their profit will most likely take some profits by selling off some of their positions; those who are heavily trapped in short positions at the bottom, the weak ones have already cut their positions, while the strong ones may add to their short positions to increase their average price; and those who have not entered the market and see that it has already risen significantly are unlikely to chase new positions. Taking into account the various forces, the market is bound to consolidate or pull back, leading to a reduction in profits or even losing them entirely.

In the early 1980s, when US President Reagan was suddenly shot, the international gold price immediately surged by over $30, and those who were long suddenly made double profits. However, these profits had to be closed immediately to be guaranteed, because later the hospital confirmed that President Reagan's injuries were not life-threatening, and due to his strong physical condition, he was expected to recover in the short term. The gold market softened upon hearing this news, and those who did not close their positions in time ended up empty-handed.

5. Always avoid going all-in

In the process of investing in futures as a small investor, the use of funds is crucial. Proper allocation of funds is important, and going all-in is a key principle to avoid. Investing with a small amount of capital requires caution and careful operation.

Trading operates on a margin system, with the margin ratio usually around ten percent of the contract's total value. A slight price fluctuation, with two or three limit-up or limit-down moves, can lead to losses. Therefore, in the process of fund utilization, there must be room for maneuver, and one must operate within their means. Some people want to get rich quickly, and if they make the right call, they can make a big profit. However, in reality, there are no absolutes, and price movements are always wave-like. Not to mention the occasional unexpected news that can reverse the market, even if there is a rebound, temporary floating losses may occur. When it comes to adding margin, without further support and lacking a second set of capital, you will be forced to cut your losses. By the time the storm passes and the market rallies significantly, you will only have regrets. The consequences of such actions have proven to be a case of being greedy for small gains, only to end up with significant losses.

6. Do not play by the rules

Many investors often incur losses because they play by the rules, while the capital market often experiences counter-trends, leading to seemingly unfair losses. In small investor investing, it is important to go against the crowd and not play by the rules.

7. What is unreasonable?

The rise and fall of the capital market ultimately comes down to the battle of strength between buyers and sellers. If there are more buy orders than sell orders, the market rises; if there are more sell orders than buy orders, the market falls. In the process of fund allocation, the flip side of making money for one side is losing money for the other side. Buyers avoid risks, which is based on sellers taking risks, and sellers making the right call also comes at the expense of buyers making the wrong call. In other words, the majority of people buy and sell to make a profit, but the premise is that there must be someone losing that profit.

For example, when positive news comes out, in general, traders should be buying more, strengthening the buying power in the market, creating a strong upward momentum. If in this situation the market does not rise but falls, it reflects an unusually strong selling force. When most people in the market are buying or selling, there must be a few "big players" who have the ability to withstand a large number of buy or sell orders. These big players who dare to go against the "majority" naturally have strong capabilities and a complete set of strategies, and the winner is self-evident.

In addition, whether buying or selling, one must go through the process of closing positions. The impact of new orders and closing orders in the market is opposite. When the majority of people are buying or selling, sooner or later they will have to close their positions. If some fundamental or technical factors cause them to close their positions simultaneously, they will trample on each other, leading to a reversal in trend. When the majority of people are overwhelmingly in one direction, going against the crowd will inevitably lead to the effect of "everyone loses but me wins".

8. Must be disciplined

Many principles of investment strategies, such as following the trend, not trading against the trend; not fearing mistakes, but fearing delays; letting profits run, etc., including fifty secret rules, winning one hundred tricks, are well-known to most traders. However, in reality, most people end up losing money. It is obvious that success in the market does not depend on which principles you believe in, but on whether you are consistent in your words and actions, and whether you adhere to them. Therefore, the key lies in discipline.

Because the market is either up or down, opportunities are fifty-fifty, with five out of ten trades resulting in losses and five in profits. If you can make the tough decision and not hesitate, cutting losses a little at a time, it's not difficult to calculate that you will profit more than lose. If small investors want to succeed in the investment market, they must learn to be more disciplined than the big players. Overcoming the mentality of luck, reversing subjective consciousness, changing lazy habits, and following the principles you have learned diligently can lead to fewer mistakes and smaller losses.


The content is provided as general information only and should not be taken as investment advice. All the contents shall not be taken as a recommendation to buy or sell any security or financial instruments. Any action you take resulting from information, analysis, or commentary on this article is your responsibility. Please consult your investment advisor before making any investments.

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