How to save trading capital when your trades go against you

• Follow

Saving trading capital is something that is very crucial and also difficult at the same time when a trade starts to work against you. However, if basic and primary things are taken care of, then this task becomes relatively easy. First of all, it is better for a trader to have exit rules in place, even before he enters into a trade. In such cases, triggering an exit is not a mental load for the trader.

Further, it is very important that one avoids falling prey to human biases. For example, whenever a position is making a loss, traders often display what is known as endowment bias. The endowment effect refers to an emotional bias that causes individuals to value an owned object higher than its market value. Here, an investor or a trader will find it extremely hard to exit and give up on the positions that he owns even if it is making losses.

So, if we sum up the basics, it is extremely important to have a stop loss — it can be in terms of percentage or in terms of absolute hard money stop loss, but it should be there. Milan Vaishnav, CMT, MSTA, Consulting Technical Analyst, Gemstone Equity Research and Advisory Services said, “If the stop levels are tested, they must be triggered in a very unemotional way. This is easier said than done, but it is very important that the traders become mindful of this fact.”

Stop loss can be defined as an advance order to sell your shares when it reaches a particular price point. It is used to limit loss or gain in a trade.

Mazhar Mohammad, Founder, Chartview India said, “Simply by placing a stop loss a trader can protect his/ her capital. Usually in a single trade one should prepare not to lose more than 2% of their capital. Therefore, stop loss should not be not more than 2% from your entry point.”

On the other hand, Nirav Chheda, Technical Analyst at Nirmal Bang Securities added that buying protective puts are the best way to save your capital. “Also keeping stop losses are a sure-shot way of limiting loss,” he added.