The goal of novice traders is to make money from the market anyhow. But they forgot that preservation of the capital comes first. Because without the capital you can’t survive or place trade in the market. Protecting the capital on the every stage of trading will allow you to grab the further opportunities in the markets. Every trader may compound their accounts if they have capital left in their account. Without the capital in the market, it’s like a “soldier without the artillery or a warrior without the sword”.
What Is Capital Preservation?
Capital preservation is protecting the capital by avoiding the unwanted loses. Protecting the capital requires strict risk management rules, disciplined trading approach towards the market and a string trading psychology. However the aim isn’t avoid the loss completely because it’s a part of the trading, but to ensure the risk is fixed according to the trading account and doesn’t leave big dent on your trading capital.
The Calculation Of Loses
In trading maths calculation, if you want to recover the capital which is lost in the previous trade, then you need to more percentage of gains than lost percentage.
10% loss requires 11% of return to get to the breakeven
20% of loss needs 25% of return to recover the loss
50% of loss needs 100% of return of recover the capital again.
Why Survival Surpasses The Gains
The Risk To Ruin: Placing all the capital after the one trade may confirm the massive drawdown of your trading account. Meanwhile prioritizing the capital preservation will decrease the chances to make your trading account zero instantly.
Emotional Resilience: Chasing the big moves or trades impacts your disciplined trading and trading psychology and often leads to trade out fear fomo and greed. Which ensure that start placing the trades at the random levels and avoiding the risk management rule from your trading. Awaring the about the fact that your risk is fixed and won’t dent your capital more than this amount, will secure you mentally and reduces your fear and allows you to move on to the next trade comfortably.
Present In The Game: Protecting your capital will ensure you to survive in the game in the long run. It will give the enough time to the probability to work in your favour and let your edge play in the market and work in your favour.
Methods To Preserve The Capital
Follow The 1-2% Rule. Your stop loss for the one particular trade should not exceed more than 1-2% of your total trading capital. As a result this will protect your psychology and discipline. Meanwhile after losing streaks of some consecutive losing trades you will still have the 80-90% to use for the trade again.
Always Use Stop Loss: In the every market condition always trade with the stop loss. Fixing the loss limit is one of the essential part of disciplined trading.
Why Many Traders Focus Too Much on Profits
Focusing too much on the profits is the sign of newcomer trader in the market. Because their introduction to the markets is like, this is the place of generating quick profits. This often leads to take emotional decisions and weaken you trading psychology and trading discipline.
The Trap Of Quick Or Instant Money: Greed often brings the urgency of doubling your trading capital in a single day or trade. Which make them focus on catching the big trades or win. This allow them to focus on increasing the risk, position sizing and overtrade until they catches that one big move.
Conceit and the Winning Bias: Novice traders can’t accept the pain of being wrong in the markets. Aiming only for the profits, will shift your focus to winning mindset. Which leads to build ego and greed. That’s why beginner trader often place the another trade after getting stopped out from the one trade.
Recency and Omitted variable bias: Social media influencer on the social media showcase their big returns from the markets in the one day. So the newcomer traders often get excited from this and starts aiming for the same returns and profits. Rather than focusing on their process and time like how years they take to make this amount returns.
Outcomes Profit Maximization Triggers Failure: This covers that focusing on the results instead focusing on the process. It includes booking your winning trades early, holding the losing position and revenge trading and all.
The Importance of Surviving Losing Streaks
Survival from the losing streaks is the crucial part of the trading system. Because it shows how strong your trading psychology is and how much disciplined trader you are. Survival from the losing streaks shows that the markets aren’t predictable and the losing phase is test of the traders by the market who think they can make their way through it. Meanwhile it builds the psychological and emotional persistence which is required for long term success in the market.
The Calculation Reality
Although there is no strategy in the market has 100% win rate. Meanwhile if your strategy has 50-70% then it’s good ratio. Here in trading everything depends on how much you are winning when you are right and how much you are losing when you are wrong. If you are losing more than winning then no strategy in the market can make you profitable. And if you winning more and losing less then the strategy with 30-40% win rate is enough to make you profitable.
Why Survival Matters
Protecting Capital: If you are risking more and trading with more than standard lot sizing according to your trading account. As a result a 10 continues loses, may cause you to lose the trading capital. After you won’t able to do trading in the market. That’s why survival matters.
Conserve Psychological Control: As i have said earlier losing streak is the test of emotions and discipline before the market gives you sustainable growth. Traders who take it as the part of trading and keep the psychology and discipline intact, are the ones who becomes profitable traders.
Assessing The Edge: Finding your edge in the market, finding something which works for you. This can be any confirmation, risk management style, trading hours anything. Your edge makes you survive from the losing streak. That’s why finding the edge in the market is important.
Capital Preservation and Trading Psychology
Preservation of capital is the first rule of trading. It’s a foundation of long term growth in trading. However preservation of the capital includes the control over the fear greed and fomo. Which keeps you running in the long term game of survival in gaming.
Why It Matters
Loss Math: A 50% loss of your trading capital, needs the 100% return to get back to the breakeven stage. That’s how a big loss requires the more gain than the lost ones
The Survival Game: However you need capital in your trading account to grab the further opportunities in the market. A fixed risk on the every trade will allow you grab the next opportunities in the market
Methods For Capital Preservation
Fixed Risk: Decide the risk of the every particular trade like 1-2% of your trading capital. It will prevent you from the instant wipe our of the trading capital.
Stop Loss: A stop loss defines that how much loss you can bear for the particular trade. It works as a shield to your capital which protects you form the capital blow up.
Risk-Reward: Aiming for 1:3, 1:4, or more than that will keep you in profits, even if you face some losing streaks. That’s why traders say that you should win more when you are losing.
Final Thoughts
Traders come to the market aiming for the how much amount they want to make from the markets. However money comes from market when you start shifting your focus from money making to protecting the capital.
Protecting capital doesn’t mean avoiding every trade but it says if market conditions doesn’t allow you to trade under your pre-defined risk management or demands more risk then you should protect your capital by avoiding the trade.
Traders who’s priority is to protect the capital are the one’s survive longers than the anyone else.
Check out my previous blog on Why Consistency Matters More Than Big Profits