Hello, This is Lucas.
Actually, there are some patterns for how traders lose their money while trading.
So, I am going to talk about it today!
The prospect theory
Prospect theory assumes that losses and gains are valued differently, and thus individuals make decisions based on perceived gains instead of perceived losses.
What would you do if you have these choices?
1. You can get 1 million yen unconditionally
2. You can get 2 million yen if you win the coin toss, but if you lose, you will have nothing.
Many people will choose 1,
but still, some people choose 2.
However, if I say
1. You have 2 million yen debts, and you can reduce 1 million yen debts unconditionally.
2. If you win the coin toss, you can pay off all debts, but if you lose, the debts are still 2 million yen.
At this situation, most people will choose 1.
This is the prospect theory.
People who only see their current profits and losses are easy to be affected by this theory.
I mean they are changing the expected value of trades by themselves.
If I say more clearly, you make your strategy unworking by yourself.
They don’t do the trade statistically, but they trade only by their feelings.
If you manage your risk management by your feelings,
you will lose all deposits in the account before long.
Even if you could make some profits in the short term, it won’t last so long.
This is an important theory when you do the trade, so please keep it in mind!
Win a small amount, lose a normal amount
I am going to talk about what will happen if money management gets neglected.
even your strategy is profitable, but don’t bet always the same amount of bet.
What’s going to happen?
Your deposit may decrease gradually because you might lose a lot when you bet a bigger amount of money than usual.
This is how people lose their money.
Maybe you have experienced this when you were a beginner, huh?
What you can learn from these points is…
Follow your risk management no matter what happens!!!
If you ignore risk management, you will never be a good trader even if you do the trading for 100 years.
More than 80% of traders who I saw lose because of this.
All you have to do is just know your logic`s expected value beforehand
and trade mechanically without your any feelings.
This is so important, and actually not a that difficult thing.