Skilled traders never take their trades with emotions. They always evaluate the risk profile before taking any steps in the retail industry. Since the outcome of the trades is completely random, they also prepare themselves to deal with the frequent losing trades. If you want to become a successful trader, you should also do the same. Unless you develop some unique sets of skills, it will be really hard to become a professional trader.
The experienced traders always encourage novice traders not to think about the profit factor. If a trader starts thinking about the big profit potential at trading, they will slowly mess things up. That’s why they need to focus on the safety of their capital. Now let’s explore the top three techniques by which we can avoid losing trades in the options market.
1. Trade in the higher time frame
Those who are trading in the lower time frame tend to fail in most of their trades. Lower time frame trade signals are not that accurate and it doesn’t provide enough opportunity to the retail traders to make significant progress in their life. But if you start analyzing the data in a higher time frame, you should be able to avoid many false signals. Most importantly, the trade setups will be much more accurate and you will feel more confident with your actions.
While trading the higher time frame, you will often get bored. But there is nothing you can do to avoid the losing trades. The only way by which you can protect your capital is by developing your patience level. Once you have enough patience to wait on the sideline, you should be able to look for the best trade signals.
2. Backtesting the trading strategy
The elite traders at Saxo Bank always encourage novice traders to back-test the trading system. Without back-testing the trading system, the traders will never learn to take the trades with confidence. Unless you know that the system which you will be using is accurate, you will never feel confident with the market. While doing the backtesting of your trading strategy, you should neutrally evaluate the data. If you think backtesting your trading strategy is not but a waste of time, you are making a big mistake.
While doing the backtesting, you should use a demo account. Unless doing the backtesting in the demo trading account, you will never learn to avoid losing trades. The professional traders encourage the novice traders to test things in the demo platform as it gives the retail traders a unique opportunity to learn things about the market.
3. Use stop loss and take profit
You should always use protective stop loss and take profit to make regular profit. The novice traders think they can get away by using the mental stop. But this doesn’t work in the investment industry. If you want to protect your capital, you must set the stop loss right after taking the trades. By doing so, you can limit the losses in the trading industry. Never expect that you can become a profitable trader within a short time without doing the proper market analysis. Take your time and learn to evaluate the risk profile.
Some traders often take the trades by ignoring the basic risk to reward ratio. The minimum risk to reward ratio in each trade should be 1:2. If you manage to follow this rule, you should be able to take the trades with more confidence.
A trader should always aim for a higher risk to reward ratio factor in each trade. By doing so, they can easily recover the losses. Sadly, the new traders always trade with negative or 1:2 risk to reward ratio and make things worse. So, try to improve your risk to reward ratio factor as it will help you to take wise decisions.