Management of Losing Trades

No matter which financial markets you trade, you will always experience losing trades. The rollercoaster of trading means you can experience the full spectrum of highs and lows over a matter of minutes in the course of your investing, and this is never truer than with the futures markets. Highly leveraged transaction sizes combine with volatile markets to make the risk to reward ratio much greater for those dabbling in futures, so it becomes even more important than ever to fully understand and embrace the potential for losses from your trading activity.

All too often, the default position for new futures traders is to maximise earnings. This is obviously an admirable goal, and one that all traders should ultimately strive towards, but it shouldn’t come at the expense of managing risks and absorbing losing trades. The defensive angle to trading futures, or anything else for that matter, is equally as important as the offensive angle, and ensuring you have the right strategies and precautions in place to protect your capital can help you negate these adverse effects.

So how can you manage the inevitability of losing trades, and what methods, strategies and tools are available for minimising the potential for losses from bad trading decisions?

Cut and Run

The first strategy you can deploy to great effect in managing your exposure to losing trades is to cut and run. Counter intuitively, there is no point in allowing a losing position time to recover. If a position you have taken shows to be moving against you, the sooner you make the decision to cut your losses, the better positioned you will be. In effect, simply taking a small, upfront loss rather than a colossus negative later down the line can actually be a good thing, ridding your portfolio of a wasting position and freeing up your remaining equity to deploy in alternative market positions. As you leave profits to run for as long as possible, cut your losses as quickly as possible – particularly in highly leveraged transactions like futures trades where the risks can be that much greater.

Set Stops

A method for reducing your downside liability during a trade is through the use of guaranteed stop losses. Stops are automatic trigger price points at which your broker will automatically execute your chosen instruction – this might be to sell if a price hits a certain low, for example. Stops effectively set floor and ceiling triggers to cap losses and take profits automatically, and can be particularly useful in preventing losses in riskier positions. That said they are not recommended for use on every trade, and stops do have their own disadvantages that can serve as a handicap to trading performance. Stops are best used in greater risk scenarios.

Trade With The Trend

As a general principal, trading with the trend of the markets is one of the best ways to limit your exposure to risk and the resultant inevitable losses. If indicators point one way and market trends point the next, it will almost always be better in the short term to follow the market. Unless you have deep pockets and are able to fund your position until momentum shifts in your favour, you are usually better advised to trade in line with the general market trend. Remember that the futures markets are traded in huge volumes, and there’s very little you can do personally to shape the trading outcome. As a result, your best chance of success lies in trading with, rather than against, the price-setting crowd.

Manage Your Capital

Whenever you’re trading any amount of capital, it’s always essential to have more capital in reserve to absorb losses and prevent overtrading. The management of capital is an integral part of a safe investment strategy, and you should never be staking transactions than in aggregate pose a critical threat to your portfolio in the event of a market crash. Manage your capital conservatively in defence, and trade your allocated trading capital with vigour to achieve the best blend and afford the highest degree of protection against damaging losses.

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