Price Volatility Isn't the Problem; Inability to Handle It Leads to Liquidation

Many people understand that the market carries risks, but most recognize risk primarily as price volatility. Most people believe that price fluctuations, if judged incorrectly, lead to losses. However, consider an extreme scenario where you can withstand all price fluctuations. Does this mean that such volatility isn't a risk but a manageable cost for you？

In my opinion, the market's risk isn't primarily due to price volatility itself. Everyone in the market knows that prices either rise or fall. The real risk comes from being unable to bear these price fluctuations. Simply put, the risk arises because you can't afford to lose.

Whether you can afford to lose depends on three factors: your mindset, your capital, and how you manage that capital.

1. Mindset: This is subjective and varies with each person's character and experience.

2. Capital: This is a relative concept and hard to measure.

3. Capital Management: This is universally applicable and worth focusing on.

Capital management isn't a fixed rule. Every investor aiming for long-term success should find a suitable capital management method. Here are some general guidelines:

Reasonable Position Sizing

Pyramid Position Sizing: Building your entire position at one price level is a mistake and dangerous. Instead, decide how many lots you want to buy. For instance, if you plan to buy 200 lots, start by buying 80 lots at a low price. If the price rises, buy 60 more lots, and if it continues to rise, buy another 40 lots. Observe the performance and, if it remains positive, buy the final 20 lots. Each follow-up purchase should be at a higher price than the previous one. The same rule applies to short selling, where each sell should be at a lower price than the previous one.

Avoid Full Margin Trading

Many investors see high leverage as beneficial, as it magnifies the capital's efficiency. However, the risk is equally magnified, making full margin trading highly likely to result in significant losses. Diversifying investments increases the chances of winning. Consider different trading systems and analysis methods, each with varying success rates, to reduce the risk of loss. Remember, trading is about probabilities, not certainties. Even a 99% success rate has a 1% chance of failure, and that 1% could be disastrous.

Before trading, establish a clear stop-loss point. Never let losses exceed 10% of your total investment. If you lose 10%, recovering it with the remaining 90% is relatively easy. But losing 30%, 40%, or more makes recovery very difficult. Smaller losses mean easier recovery, whereas larger losses exponentially increase the difficulty of making a comeback.

Reserve Funds

A successful trader must always have reserve funds. Just like a good general always has reinforcements ready, reserve funds should be kept in the bank. This prevents total liquidation and bankruptcy.

Keep Profits in Hand

After making profits, decide whether to reinvest everything or keep some as reserve. While some achieve overnight riches by reinvesting profits, a safer approach is to keep part of the profits as savings. This way, even if the market turns, you have a safety net.

Consider a case where a trader turns a few thousand into millions but doesn't cash out. A market downturn wipes out the gains, bringing the account back to the starting point. If the trader had cashed out even 20% of the profits, they would have secured a substantial gain.

Investors should enter the market with clear goals: to increase capital returns and generate steady profits, not just to speculate and hope for quick riches. The trading market is like a battlefield without smoke; investors should be prepared for long-term combat, not risking everything for short-term gains. Establish a personalized capital management strategy and stick to it. This way, you'll emerge victorious in the long run.

Summary

Price volatility itself isn't the problem; it's the inability to handle it that leads to liquidation. Proper capital management, a resilient mindset, and strategic reserves are essential for long-term success in trading. Follow these principles to manage risks effectively and ensure sustainable profitability in the market.