In trading there are tactics, strategies and methods of various kinds but the secret to earning is only one
We often see advertisements of infallible trading methods, tactics, strategies and opportunities on various financial instruments, but the real secret to earning is only one: before earning, you should focus on not losing money, i.e. the principle of preservation of investment capital.
Many traders, or wannabe traders, concentrate on earning, on making a lot of money, on searching for the best investment, but basically you cannot make an investment without first calculating how much capital to allocate and if the investment assumes the preservation of capital in the long run. Let’s see together this principle and how it involves a radical change in the development of one’s own trading method.
The wrong assumption
Many wannabe traders start from the wrong assumption that to make money trading you have to look for the perfect tool, the strategy and the best method to “break the market”, something that doesn’t actually exist within the panorama of financial markets. This frantic search for the perfect recipe for trading diverts attention from the key principles of trading which mainly concern the basic assumptions of money management and risk management.
According to these two disciplines, which consist in the management of risk and one’s positions on the market, one must measure risks and adjust them on the basis of a certain regularity which provides for exponential capital growth in the long term. While these two disciplines will prove fundamental to a trader’s operations, they will still not serve to eradicate the belief that there is a foolproof method or a formidable trading strategy.
The problem therefore lies in the first approach. Let’s take an example according to which a trader has an excellent strategy, good money management and good risk management. At this point, if this trader has a mindset to seek gain at all costs, he will get to the point where he will probably make blunders, which has happened to most of those traders who have since gone pro.
Had this trader focused on not losing money, rather than trying to make as much of it as possible, he would have drastically reduced the amount of mistakes. In trading, the error is a fundamental component for what the Anglo-Saxons define as "consistency", ie the constancy in the result and in the profitability of one’s track record. The principle according to which money must not be lost is fundamental precisely to avoid those apparently irrelevant errors in terms of money management and risk management, but which make the difference in constancy and long-term profitability.
“Don’t lose money” and capital management
This principle is everything for those who make trading their profession. Surely even professionals have a period where they run into errors, but these mistakes are usually measured a priori and which is part of a risk management that provides for the preservation of capital.
The difference between a trader who fails to earn in the long run and one who professionally earns consistently is purely mental and lies in seeing trading as that activity which provides for the smallest possible loss of capital against an investment.
The professional trader, who is consistent in the long run, does so as to carry out operations that affect one’s capital as little as possible and anticipates a minimum loss and a potential profit multiple of the potential loss. In practice, in addition to setting up an advantageous risk/reward, he enters the market knowing that he will be able to cover the risk of his position in the shortest possible time.
How to apply this principle?
Changing perspective on trading is not difficult, given that this is a job where the mental/emotional component is decisive. We must therefore focus on looking for a good opportunity that is in line with measured money and risk management and calculated in advance, and that falls within a scheme that provides for a potential loss that does not affect the capital consistently.
Furthermore, the trader should focus on the part that concerns the possibility of cutting his risk as soon as possible, i.e. trying to make sure that his position does not lose. This work can be done in different ways and in different ways, all depending on the type of trading strategy and the average investment timing. In the end, changing one’s approach from "I want to earn a lot" to "I want to preserve my capital", will lead to a radical change in one’s vision of work, which will inevitably lead to an improvement in results in the long run.
Furthermore, in the early stages, one may also notice a huge change in the operation and one’s way of seeing the financial markets.
This principle is therefore, very likely, the real "secret" that is needed to improve and to obtain results in this work which is by now mistreated and soiled by false beliefs, which discredit its importance and prestige.
Original article published on Money.it Italy 2023-01-05 08:57:00. Original title: Trading, il “segreto” per guadagnare
