Detailed interpretation of trading 'death points'
Heavy positions lead to death
Risk amplification principle: When traders use heavy positions for trading, if the market trends unfavorably, losses can be magnified due to excessive positions. For example, in forex trading, under normal leverage ratios, if the position is 10% of total capital, a 1% market fluctuation results in a 0.1% loss of total capital; however, if the position is 90% of total capital, the same 1% market fluctuation results in a 0.9% loss of total capital. In extreme situations, such as black swan events where prices fluctuate dramatically, heavy positions can lead to account funds instantly hitting zero, a situation particularly common in futures and cryptocurrency markets.
Psychological pressure factors: Heavy positions can also bring tremendous psychological pressure to traders. When most of the capital is at risk, traders find it challenging to maintain calm and rational decision-making. For example, a stock trader who invests the majority of their funds into one stock may become anxious when the price slightly drops, possibly making a sell decision at an inappropriate time, leading to losses.
Floating profit adding positions leads to death
Profit withdrawal risk: Floating profit adding positions refer to increasing position size when a trade is already profitable. Although this practice can lead to substantial profits when trends persist, it also significantly increases risk. For instance, in gold futures trading, when prices rise and traders add to their positions after gaining floating profits, if the market subsequently reverses, the newly added positions can quickly incur losses, potentially erasing previous profits. This is because adding positions changes the cost of the overall position and increases sensitivity to market fluctuations.
Uncertainty in trend assessment: Market trends are complex and variable, making it difficult to accurately judge their duration and intensity. Even if a previous trend is upward, there is no guarantee that it will continue after adding positions. For example, in the stock market, a stock may rise due to short-term favorable news, and the trader might add to their position after seeing floating profits. However, if subsequent news changes or market sentiment shifts, causing the stock price to fall, severe losses will occur.
Adding positions in floating losses also leads to death
Loss expansion dilemma: Adding positions in floating losses is a strategy aimed at reducing average costs by increasing position size, but it often leads traders deeper into loss. For example, in crude oil futures trading, when prices fall and traders are already in a floating loss state, they may add positions hoping for a price rebound to recover faster. However, if prices continue to fall, losses will accelerate as positions increase. This is because each position addition increases the invested capital, while losses are calculated based on total capital invested.
Ignoring market signal risks: This practice may also cause traders to overlook adverse signals from the market. When the market continues to weaken, the correct approach might be to stop loss and exit, but the behavior of adding positions in floating losses may lead traders to blindly expect a market reversal, thus missing the best stop-loss opportunity.
Frequent trading leads to death
Accumulated trading costs: Frequent trading leads to a significant increase in transaction costs. For example, a trader who frequently buys and sells stocks might incur a cost of 0.1% per trade. If they trade once a day, the monthly transaction costs could reach 2-3% of their total capital. These costs continuously erode profits, making it difficult to be profitable even if the trader has a certain win rate.
Decline in decision quality: Frequent trading prevents traders from having enough time and energy to analyze the market deeply. They often trade based on short-term price fluctuations or intuition rather than rigorous analysis and trading strategies. For example, in forex day trading, frequently entering and exiting the market can lead to traders being unable to accurately grasp macroeconomic factors and long-term trends in exchange rates, resulting in poor decisions.
Not setting stop-loss leads to death
Unlimited risk exposure: Not setting a stop-loss means that traders do not effectively control risk during trading. If market trends go against expectations, losses can expand infinitely. For instance, in cryptocurrency trading, due to high market volatility, failing to set a stop-loss can result in massive losses when prices drop significantly, potentially losing all initial capital. A stop-loss acts as a safety barrier to limit losses in adverse market conditions.
Psychological factors influence: Not setting a stop-loss also reflects a trader's lucky mentality. They hope the market will reverse and are unwilling to admit that their trades might be wrong. This mindset can lead traders to hold onto positions even as losses grow, ultimately resulting in unbearable losses.
Blind entry leads to death
Lack of analytical foundation: Traders who enter blindly usually do not conduct adequate market analysis, potentially due to believing unverified information, following trends, or acting impulsively. For example, in the futures market, some traders blindly follow others buying a certain commodity without considering fundamental factors, market supply and demand, and price trends. Such trades lack a rational basis, making success rates very low.
Lack of trading plan: Blind entry also means that traders have not developed a trading plan. A trading plan includes entry points, exit points, stop-loss, and take-profit settings. Trading without a plan is like a ship without a rudder, easily losing its way in market waves. For example, a stock trader without a trading plan may not know when to sell after buying stocks, leaving it to chance and often resulting in losses.
Counter-trend trading leads to death
Counteracting market forces: Counter-trend trading refers to traders operating against the main market trend. Market trends are usually formed by the consensus of numerous participants and macroeconomic factors, giving them strong power. For example, in the commodities market, when the market is in a clear upward trend, traders who short against the trend must bear significant market pressure. In an upward trend, the momentum of price increases is often strong, making it easy for counter-trend traders to be overwhelmed by the upward forces.
High probability of trend continuation: From a probabilistic perspective, market trends tend to continue over certain periods. For example, in a bull market, the upward trend might last for months or even years. Counter-trend traders often ignore this continuity of trends and attempt to profit in unfavorable market conditions, which is very difficult and highly risky.
Emotional trading leads to death
Emotional distortion of decision-making: Emotional trading refers to traders making trading decisions influenced by emotions such as fear, greed, and anxiety. For example, in stock trading, when prices rapidly rise, traders may chase prices due to greed without considering valuation factors. Conversely, when prices fall, they may panic and sell due to fear, ignoring the stock's fundamentals and long-term value. These emotions can lead traders to make decisions contrary to rational analysis, resulting in losses.
Emotional cycle trap: Emotional trading can create a vicious cycle. When traders make wrong decisions due to emotions, leading to losses, they experience more negative emotions, such as regret and self-blame, which further affect their next trading decisions. For instance, a trader might feel more regret after an emotional sell-off when they see prices rise again, making them more impulsive in the next trade in an attempt to recover previous losses, resulting in deeper losses.
Strategies to overcome human weaknesses and achieve success
Knowledge learning and self-awareness
Building a trading knowledge system: Traders need to learn in-depth about trading-related knowledge, including technical analysis, fundamental analysis, and trading strategies. By learning technical analysis tools like candlestick charts, moving averages, and relative strength indicators, traders can better judge market trends and price movements. Additionally, understanding fundamental factors like macroeconomic data and company financial health is crucial for long-term investment decisions. For instance, a bond trader who learns about the impact of macroeconomic policies on interest rates and the fundamental knowledge of bond credit ratings can more accurately judge bond price trends.
Self-emotion and behavior pattern recognition: Traders must have a deep self-awareness of their emotions and behavior patterns. This can be achieved by reviewing their trading records and analyzing the conditions under which they are prone to emotional trading or blind entry. For example, if a trader finds they are prone to impulsive trading after consecutive losses, they can develop corresponding strategies to cope with this situation, such as pausing trading or adjusting their mindset.
Formulating trading plans and rules
Personalized trading plan design: Create a trading plan that suits you, including clear trading objectives, entry and exit rules, and position management rules. Trading objectives should be determined based on your capital size, risk tolerance, and investment horizon. For instance, a retirement fund investor’s trading goal may be to achieve steady asset appreciation over the long term, while a short-term speculator’s goal may be to achieve a certain return within a short period. Entry and exit rules can be formulated based on technical or fundamental analysis, such as entering when a stock price breaks a key resistance level and exiting when it falls below a significant support level or reaches preset take-profit/stop-loss levels. Position management rules should consider risk control, such as keeping each trade's position within a certain percentage of total capital.
Strict execution of trading rules: Once trading rules are established, they must be strictly followed. This requires traders to have strong self-discipline. For example, when market trends trigger stop-loss rules, they must execute stop-loss operations without hesitation and cannot violate the rules due to lucky thinking or emotional factors. Automated stop-loss orders can be set to ensure rule execution.
Mindset adjustment and emotional management
Emotional awareness and regulation techniques: Traders should learn to be aware of their emotional changes and be able to take effective regulation techniques in a timely manner when emotions arise. For example, when feeling anxious or greedy, they can use deep breathing or temporarily step away from the trading screen to alleviate emotions. At the same time, they should establish a correct trading mindset, viewing trading as a long-term process and accepting losses as part of trading. For instance, in futures trading, due to market volatility, losses are common, and traders must learn to adjust their mindset after losses and summarize their experiences instead of falling into negative emotions.
Cultivating patience and calmness: Trading requires patience to wait for the right trading opportunities and not rush for success. For instance, in forex trading, while rate fluctuations may present many seemingly opportunistic situations, truly meeting trading strategies may be few. Traders should learn to calmly observe the market and wait for high-probability trading opportunities. Simulation trading and meditation can help cultivate patience and calmness.
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Disclaimer: The content published in this article aims to share information and disseminate knowledge, not to provide any specific investment advice. We strongly recommend conducting independent research and analysis before making any investment decisions and making informed decisions based on your personal financial situation, investment goals, and risk tolerance.
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