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Understanding the delicate balance between your level of comfort and uncertainty against a specified time period is the secret to any successful investment plan.
The balance between risk and reward will determine the type of investment strategy that you will take.
A more aggressive approach can be taken by those who start investing early on. This strategy seeks to beat the dollar inflation rate. Those who are investing later in life will follow a conservative approach to minimize the volatility of their portfolio.
Regardless of your risk and rewards profile, a good investment portfolio needs diversification. Even though this reduces volatility, no portfolio is protected against risk or loss.
Here are some wise steps to follow after suffering from a major loss or losing streak:
Was your recent loss your largest? Is this your first major loss? If that is the case, make sure to own up to it. Losses happen to every trader regardless of the experience level.
Don't just brush it away. Learn from your mistakes and don't jump back in until you've reviewed the lesson. Don't just blame your loss on market volatility, study what happened.
Evaluating your actions objectively and assessing the results of those actions will allow you to make smarter trading decisions. Learn from it, despite the difficulty of trying to counter the effect of this failure. Doing so can prevent small losses from turning into a huge drawdown.
Take a Break
Stop trading when a bad trade with significant effects happens. We will immediately begin to use ego and emotions to negate our significant loss. When you are emotionally involved, finding a better trade will only lead to more losses.
Step away from the trading screen instead. Find out how your problems can be fixed. This can be a quick run around the block for some, a yoga class for others. Determine the best method for removing negative emotions from your atmosphere.
Stop trading for a couple of days. Alternatively, do paper trading until you are profitable again. Doing so may clear up any mental and emotional barriers left behind from the bad trade.
Use the bad trade as motivation after you have cleared your negative emotions. Keep your position size small when you return to trading to prevent emotion from returning the next trade.
A disciplined measure is to get back to a trading performance similar to prior that of your bad trading day. After a bad loss, acquire safe steady gains and recreate a newly profitable investment strategy at a proper speed.
Make a Plan
Make a detailed action plan for future trades after finding your concentration and building your confidence. Set limits in your detailed plan of action. Since most bad trades can be definable due to market activity, recognize the variables that can be measured. This can include technical patterns, fundamental events, or any dynamic price driver.
For instance, gold price increases when the stock market declines. In times of economic recession and inflation, many investors see precious metal trading as excellent insurance against the dollar's weakness.
Your new trading plan should benefit as a result of your bad trade.
Recognize The Context
Experienced traders know that losses are part of the routine in a market. Inexperienced traders, however, may trade because of the humiliation and the emotion of a bad prior trade.
Keeping this loss in perspective is essential. Recall that this is simply a bad trade, in a risky market. Moments like this are critical for self-reflection. Bad trades should remind you of the many-other successes you have had along the way through the volatile market.
There is a lesson in financial losses, much like other aspects of daily life. Your bad trade may just be the loss-lesson you need to hone your trading strategy.
Without risk, there is no trade. Quantifiable key market actions determine the outcome of a trade. Despite this, there will be a loss. It is how you learn from this failure and improve that decides your performance.
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