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Preserving Capital vs. Missing an OpportunityMany traders will tell you that they would rather make a small loss than miss out on a good trade. Other traders however will tell you that your first priority should always be to avoid losses by not taking trades that you have any doubts about and that the preservation of your capital should be your first priority – don't worry about missing an opportunity they say, the market will still be there tomorrow, and there will be plenty more great trading opportunities in the future. So who is right? What should your first priority be? Should it be to filter out as many high risk trades as possible leaving only the best setups? Or should it be ensuring that you don't miss out on an opportunity? Well, as usual, the answer is that it depends... For long-term trend followers, missing out on a good trade is way worse than taking a small loss. This is because, for these traders, a single good trade can make up for an entire years losses, and since they are long-term traders making relatively few trades per year opportunities to just take another trade instead aren't all that frequent. However, most other trading strategies don't have the same average size of winning trades to average size of losing trades ratio that long-term trend following strategies do - the big winners just don't out weight the losers to the same extent with most other trading strategies. It's only with long-term trend following strategies that the size of the few big winners tends to be really huge - with most other strategies having the odd massive winning trade isn't actually the norm. And when trading opportunities are more frequent missing out on a winning trade isn't as big a deal either. For most types of traders, other than the long-term trend followers, preserving capital really should be ones first priority. So in short, in deciding which is most important, not missing an opportunity to trade or making sure that your entry setup is 100% correct, you need to ask yourself the following two questions - I'm no doubt stating the obvious in this short article, but I do I hope my thoughts on this issue are of use to someone anyway. |
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