How To Avoid Losses In Stock Market Trading

• StopLoss – The key to this game is to keep your losses small. Just note here, I am not saying that you should not make loss and always win. There is no way to make money without taking the loss. But your risk should be defined by you, not by the market. It’s not the market which should give you the loss, but you should decide that how much you want to give it to the market. So, the idea is to give less and earn more. And you can achieve this by defining your risk through StopLoss.
  
  Why the StopLoss is important for the profitable trading in stock market?
  If the StopLoss get hit, what that means? It means either of the two is true – 1) there is something wrong with the stock, or 2) your analysis to select the stock was not correct. Therefore, for either of the case, you must exit from that trade without the second thought. Remember, you can always re-enter if its again going into your favour after re-analysing the trade. This way your probability to win and becoming profitable is still high. But if you will not exit at that moment when the StopLoss git hit, and you will hold the trade in some kind of anticipation or biasness, there is high probability that you will be trap in a big loss, which could be very difficult to recover.
  Why? Let’s understand this with this example, why it’s important to cut your losses short.
  Let’s assume you buy a stock at a price of $100. It fell and corrected by 50%, so now it drops to a price of $50.  Now, from this price of $50, if this stock must return up to $100, it must regain it more than 100%. So, if it gains by 100% from $50, it will only achieve the price of $75. So, this illustrates this, once you lost the big chunks of money, it’s not that easy to gain it back after the stock renounce.
  
  
• Fund Allocation / Basketing – Its always better to plan at least 10 stocks in the portfolio for a better risk diversification. If you have a large capital, you can add more to the list and diversify a bit more. But just be cognizant of the portfolio size, which should be manageable well and tracked regularly. I have divided my trading capital into 10 parts based on my projected portfolio size of 10 stocks. My allocation for each stock is only 2-3% of the total trading capital. Why it’s important? Let’s say, you hold a stock in your portfolio and due to some kind of unpleasant news or uncertain even in that company, suddenly there could be a drastic fall in the stock prices overnight. In this like of scenario, the first thing is you will not be impacted emotionally, as this stock is just 2-3% of your holdings. You can compensate this loss easily though other assets or stocks in your portfolio. Remember, trading or investing is not a one-night game. Here, only slow and steady wins the race. To win the game you must be in the game “for longer”.
  
  
• Position Sizing – Always decide the position sizing for the trade based on the size of stop loss. The StopLoss size should be fixed for all your trades.  My trades are 4-8 weeks long and I keep the StopLoss of 5% for each trade which is generally 4-8 weeks long, against the expected target profit of 15% at least.  So, your position size for this trade should be such that you should not lose more that 5% of the allocated capital for this stock. Avoid taking extra leverage which is beyond your control.

2. Consistency
Remember trading is the game of probability, one can’t be 100% accurate in predicting the moves. The winnability is always in the form of probability, where you target the trade having the higher probability to win, but at the same time it has a lower probability to lose as well. So, losses are inevitable in the stock market. The only strategy to win here is, the profit should be higher than the losses for the number of trades we make. And that can be achieved by better risk to reward ratios (RR) for example 1:2, 1:3 and so on.. (i.e. the Rewards should always be higher for every respective risk we take.
The Risk to Reward Ratio that works best for me is 1:3 (3x returns against $1 risk). If you want to follow this ratio, a quick tip here. This does not mean that you must apply this risk-reward ratio for every trade, but you must analyze first whether the trade you are planning fit into this ratio. Your chart pattern should reflect that there is a high probability to achieve the 3X gain against the 1x risk. Otherwise just skip the trade.

Having said that, the question remains same – what is mean by the consistency in this context and why is it important?
I do trade every day, this simply means, I try to look for the right opportunity every day in the market, if I find the right trade which fit in my system, I take it, otherwise I just skip the trade. So, you must be consistent in terms of being active. If not, there is high chance of missing the opportunity. Let’s understand this with this example. Say you make 100 trades in a month. Assuming the probability of 60% winnability, means you will win 60 times out of 100 trades. Let’s say you are active for only 10 days in the market. There is a change that those 10 days could be your bad days where you got only the loosing trades. And when you are off the market, then in those days you missed the golden opportunities. Therefore, trade consistently, otherwise you will miss the opportunities. There are fixed number of days in a Month, and hence the fixed number of opportunities. If you lose any of those trading opportunity, then your Winning ratio may get disrupt.

Word of Caution – Trading consistently definitely does not mean to overtrade. You must take a break and avoid the overtrade.