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Why You Should Never Hold on to Your Positions Beyond a Certain

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Good day, traders.

I'd like to use this opportunity to advise both new and experienced traders alike that holding (hodling) your position is not recommended beyond a certain point. According to percentage calculations, the return required to recover to break-even increases at a considerably faster pace when losses grow in size (due to compound interest). It goes downward after a loss of 10% because a gain of 11% is required to make up for it.When the loss is 20%, it takes a 25% gain to make up the difference and return to break-even. To recoup from a 50% loss, a 100% gain is needed, and to reach the initial investment value after an 80% loss, a 400% gain is needed.

Investors who experience a bear market must understand that it will take some time to recover, but compounding returns will aid in the process. Think about a bear market where the value drops by 30% and the stock portfolio is only worth 70% of what it was. The portfolio increases by 10% to reach 77%. The subsequent 10% increases to 84.7%. The portfolio reached its pre-drop value of 102.5 percent after two further years of 10 percent gains. Consequently, a 30 percent decline requires a 42 percent recovery, but a four-year compounding rate of 10 percent returns the account to profitability.I will be doing a second part to this post on the idea of "DOLLAR COST AVERAGING" (DCA).

The math behind stock market losses clearly demonstrates the need for investors to take precautions against significant losses, as depicted in the graphic above. Stop-loss orders to sell stocks or cryptocurrencies that are mental or limit-based exist for a reason. If the market is headed towards a bear market, it will start to pay off once a particular loss threshold is reached. Investors occasionally struggle to sell stocks they enjoy at a loss, but if they can repurchase the stock or cryptocurrency at a lesser cost, they will like it.

Never stop learning
I would also love to know your charts and views in the comment section.
Thank you

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Today, I want to provide with you an essay that will clarify just how far you should push your trading perfectionism.

There is no ideal trading technique, to put it succinctly and painfully. Losses will be a part of life. Yes, there are High Frequency Trading (HFT) outfits that have been producing successful days after successful days for the past five years, but let me let you in on a little secret: you are not an HFT outfit. Additionally, these HFTs lose money; it's only that because they execute a million trades every day, their advantages soon disappear.

Therefore, give up hoping and begin understanding that you will lose. The ideal trading strategy is one that generates profits over the long term; a strategy that generates profits on each trade would be utopian. Additionally, you won't begin making money until you acknowledge that you will also lose money. I know it's an old story, but this is one of the factors to consider if you aren't yet profitable. You still believe you are superior to the market, and you are still searching for a trading method that guarantees a 100% win rate, deep inside your reptile brain.

Curve Fitting Is Asking For Disaster
If you still want to develop your trading strategy after it has proven to be profitable, you must proceed with extreme caution. Your winrate and reward:risk ratio will change whenever you alter a parameter in a trading system because it is such a delicate construction. Your variance, average drawdowns, average updraws, and so forth will all increase.

A trading system should only undergo subtle, gradual changes based on reliable data. If you keep trying to improve, curve fitting is what you'll finally do. As a result, there will be no room for any future changes in market behaviour because your approach will be too firmly tied to the past. However, markets are alive and continuously changing, as we all know.

Every backtest faces the very real challenge of costing a lot of money by designing a system that is too tightly based on historical data. In addition, if you have three years of data, create your system on the first two years then test it on the third year without making any alterations, regardless of the third year's results. This is why you should always utilise an outsample while backtesting.

You must eventually decide where you stand as a trader and prepare to lose.

You may already be using a winning trading strategy, but are unaware of it since you constantly try to make adjustments to your system in an effort to minimise losses. This will, however, need a change to your current setup and expose it to new risks of loss.

You will eventually just have to accept that your trading system will occasionally make bad trades because that is how trading works. Nobody would ever think consider trying to win every hand they play in poker; it is a stupid and insane idea.

Most traders ruin good systems by striving to turn them into perfect systems.

Accept this as who you are and your trading strategy, with all of its advantages and disadvantages. Accept that losses are a part of it and learn to love it. What more could you ask for when you know that you have a good outlook on life and that the system generates income for you? You already outperform around 95% of everyone who has ever entered this industry.

You must aim for excellence rather than perfection.

If you cannot fulfill your dream of creating the “Magic Strike Rate Trading System”, what is left? Excellence! It is your job to make sure to follow your system 100%. Not even the slightest deviation is allowed. Make sure you are always trading at the peak of your performance. Strive for excellence and make every trade count!

Every trade that you take outside of your trading system is an insult to yourself, to the time and effort you put into trading, and to your self-respect.

Excellence really comes down to respecting yourself in the end. Once you come to respect yourself and trust your abilities and your system, it will become easier and easier for you to follow your system.

If you go on a losing streak, find out if you completed each trade well, and if so, whether the market conditions changed or something else occurred. When you are on a losing streak, it is crucial to keep going and stick to your plan while also comprehending why you are losing. It's good if there is nothing to be done. This is how a process-oriented approach should be adopted by every professional trader.

You can weather the storm if you take pride in your losing streak, preserve your money, and trade expertly every time.

Instead of endlessly optimising one setup, focus on mastering another setup or the market.

It's really quite simple: If you follow your method perfectly for a time (let's say 50 transactions) and you are still losing money, you can say with a high degree of certainty that the system is the issue. You can then make adjustments, but if you don't use your system in the first place, you won't ever know if it works or not. Demo accounts and backtests are used for just that.

And believe me, the more focus you place on strictly adhering to your system, the quicker it will become a winning system that complements your lifestyle and personality, which is crucial.

But wow, if all of a sudden you are outperforming a sample of 50 trades. This might be it. You might have a successful strategy. Why make a change now? You are getting paid. Trade the system till you can follow it without thinking every day while doing flawlessly. Go for it if your trading log indicates that there is a LOT of potential in a particular location. Naturally, test the modified system first on a demo. If you are successful, though, and you can't locate any significant leaks, leave it alone. Don't curve fit once more.

It's fantastic if you get bored! Monotony is a sign of successful trade. Congratulations, you have mastered your setup. You can now create a different configuration using the same technique to smooth your equity curve and diversify your revenue sources.

Your equity curve will appear virtually perfect over time if you master 2-3 setups to locate trades in all market conditions, but there will still be a lot of losers among your winners, of course. Your strike rate, average risk-to-reward ratio, and risk tolerance are all important factors.

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#1 Optimism – Everything starts with a positive outlook or a hunch that will lead traders into buying a stock.

#2 Excitement – Things start to move the way we want them to you feel giddy because of it. This is where we start hoping and anticipating that we are possibly making a success story in the stock trading world.

#3 Thrill – The market is continually going in the direction favorable to you. At this point, you are starting to feel that you are too smart. This is the stage where we are fully confident with the trading system that we have.

#4 Euphoria – This is the point where both the maximum financial risk and maximum financial gain are marked. As the investments you made start to turn to easy and quick profits, we simply ignore the risk’s basic concept. At this stage, we start trading at every opportunity we see with the aim of making bucks.

#5 Anxiety – The market starts to turn around. The market is starting to get back your hard-earned gains. However, this is new to us, we still believe with the trend we have seen before and still trade.

#6 Denial – We still think that the market simply does not turn as quickly as we hoped. There must be something wrong is what we keep on believing.

#7 Fear – Reality finally sets in and you now realize that you are not that smart after all. From being confident, you are now confused. We know that we should start getting out with a small profit but we just cannot bring ourselves to move on.

#8 Desperation – At this point, all of your gains are lost. Without knowing what to do, we attempt to do things that will leverage our position again.

#9 Panic – This is the most emotional stage as this is where we are hopeless and clueless. We feel like we lost control and now are left at the mercy of the market.

#10 Capitulation – This is where we reach our braking point and start selling our position for whatever price so as we can get out and lose no more.

#11 Despondency – After our exit, we now view the market as something not for us and we develop a phobia of buying stocks.

#12 Depression – We drink, pray or cry. We think we are so dumb and we start to analyzing where we went wrong. This is where true traders are born.

#13 Hope – We realize that the market has a cycle, which then renews our hope and we believe that we can still do it.

#14 Relief – The market turns positive once again. We are seeing the coming back of our prior investment and we now have our faith in it back.

The cycle will then start all over again and it is up to you how to play it this time.