If you are a sports enthusiast, you probably know that the best offensive team does not necessarily win the championship. Instead, it is normally the best defensive team that will come out on top. Of course, to score - you need offense. But with a solid defense, you do not need to score very often to win. As long as your team does not concede any points, then you cannot lose - a draw is the best your opposition can do against your team.
What has this got to do with anything in trading? The same principle holds in trading. All traders are excited about making money - most do not think about protecting their investment. Defense or stop loss is necessarily to protect what you have and risks have to be carefully analyzed to ensure that your odds of success is high. A good defense will limit and minimize your losses - making it easy for you to recover from this minor setback.
In many ways, sports and trading have this similarity. In sports, when your team is behind, the players will be motivated to attack and also take more risks that will leave the defense vulnerable. In trading, same - when you lose, you will be thinking of getting back your capital by taking more aggressive positions. Sometimes, trade even when there are no good trading opportunities.
The harder you try to get back into the game the worst it becomes. As trader, we have all been through this unfortunate path before. This becomes dangerous because taking aggressive positions made through emotional decision making will cause even more damage to your portfolio. While this could provide the adrenaline rush and the excitement, it definitely will not provide any help to your financial well-being.
When you understand that you can prevent taking big financial loss (in any venture), this is when you will start to see your assets grow. The only way to protecting what you have is to organize a strong, non-compromising defensive line-up. This defense will ensure that you will always be in the game.
Every time you look at a trade - think of your defense first before thinking of your profit. Eventually this will set the discipline in you. This simple rule will keep you in the world of investing for a long time. Capital preservation is key to your survival in the investing game or any business. Build a good defense and you might be pleasantly surprised how easy it is to profit from the market.
Get your game plan together - weigh the risk and challenges that you face. By looking at the big picture, you can gather enough information to come up with an intelligent defensive strategy. A strong defense will keep you from going out of business.
