This is the reverse-engineering method to break away from losing trades! (Part 2)

― What are the loss-cutting methods to become able to win

In the previous first part, we introduced the current profits and losses of JapaneseFX investors, and showed that the importance of “keeping at it for the long term” in the market to become a winning trader. This time, as the middle part, we would like to introduce the loss-cutting methods to avoid significantly reducing assets.

Also, regarding loss-cutting, there is a distinction between “can do” and “cannot do,” but we will omit the content of “a method of loss-cutting for those who cannot cut losses” this time, and focus on those who can cut losses but whose assets are decreasing, explaining what kind of loss-cutting can prevent further losses and keep from losing too much.

― It is important to think from risk rather than expected profit

To get straight to the point, the conclusion is to implement the “2% rule” or the “1% rule.” Some readers may think, “Oh, I already know that.” However, even if you know this rule, not many investors actually implement it properly.

Many of the people who purchase my materials have not been able to win in the market so far, but those who correctly decide on their own trading rules and properly implement the “2% rule” or the “1% rule” have, after repeatedly cutting losses and taking profits, become overall profitable. Why do they become profitable?

Because they do not let themselves lose more than they gain. By maintaining “not losing a lot,” they create opportunities to greatly increase later, so eventually they stay profitable in total.

―Effect on assets when implementing the 2% rule

Now, from here I would like to verify with concrete numbers. First, the “2% rule.” The 2% rule means that “the loss in a single trade should be kept within 2% of assets.”

For example, to make it easy, suppose the investment capital is10,000,000 yen. If the investment capital is10,000,000 yen, 2% is 20,000 yen, so the loss on a trade should be limited to 20,000 yen at most. If the trade involves currencies against the yen, such as the USD/JPY or GBP/JPY pairs, with a lot size of10,000 units, the loss cutoff would be 200pips, and with100,000 units it would be about 20 pips, and so on.

※A loss-cutting width of 200 pips per trade is a fairly large number, so unless you are focusing on mid- to long-term trading, you should avoid it.

Therefore, below, by applying the 2% rule, suppose there are 10 consecutive loss cuts; how will the assets decrease? I will look at it one by one.

Loss cut 1st time：980,000 yen, loss cut2nd time：960,400 yen, loss cut3rd time：941,192 yen, loss cut4th time：922,368 yen, loss cut5th time：903,921 yen, loss cut6th time：885,842 yen, loss cut7th time：868,126 yen, loss cut8th time：850,763 yen, loss cut9th time：833,748 yen, loss cut10th time：817,073 yen

Even if there are 10 consecutive loss cuts, the assets will decrease by only20.％ If you have investment experience, you know that it is very difficult to win 10 consecutive trades and very difficult to lose 10 consecutive trades as well.

※If there is anyone who loses in 10 consecutive trades, I personally think you need to review your trading method.

To return to the main point, even if you lose 10 times in a row, the asset decline will be within 20%. This level of decline is recoverable, but many losing investors have one loss amount that is too large, so after one loss or a few losses they cannot recover, and are forced to quit the market.

By the way, if the loss in a single trade is 10%, the degree of asset decline is as follows.

Loss cut 1st time：900,000 yen, loss cut2nd time：810,000 yen, loss cut3rd time：729,000 yen, loss cut4th time：656,100 yen, loss cut5回目：590,4906回目：531,4417478,2978430,4679387,420 yen, loss cut348,678

In fact, with 10 consecutive loss cuts, assets would drop by 65%. In reality, the loss on a single loss cut is often not limited to 10%, so the decline would occur even faster.

Many individual investors trade with gains as the premise, but since there is nothing absolutely certain in the market, in trading it is important to approach with loss-cutting as a premise for risk.

Incidentally, what happens if you apply the 1% rule? We will look at it below.

― What is the asset decline when implementing the 1% rule

Loss cut 1st time：990,000 yen, loss cut2nd time：980,100 yen, loss cut3rd time：970,299 yen, loss cut4th time：960,596 yen, loss cut5回目：950,9906941,4807932,0658922,7459913,51710904,382

Remarkably, with 10 consecutive loss cuts, assets remain above 90% of the original, i.e., the asset decline is over 10%. In reality, since the loss on one loss cut is not typically limited to 1% immediately, the decline tends to occur even faster.

Many individual investors tend to trade assuming profits, but since there is nothing absolutely guaranteed in the market, it is essential to approach trading with loss-cutting as the baseline. Finally, what happens if we apply the 1% rule? We will look at it in detail in the next section.In the meantime, the keyword is “risk-reward.” There are two kinds of uses for this risk-reward, and we plan to introduce the details in the next part.