A Simple Rule For Trading: It's All About Controlling Your Losses

Before you start trading, make sure that you understand the fundamentals. Here are a few basic rules to keep in mind to ensure that you make a profit.

- Simon Brown

I want to talk about trading this week. Not trading strategies or where to put the stop-loss or what derivative product to trade or time frame to use – rather, I want to start with a simple analogy that will hopefully help you understand the simple probability involved in trading. By implementing some basic rules, we can use this to our advantage.

Let’s start by tossing a coin, and letting it land on the ground. Every time it lands on heads we make 100c and every time it lands on tails we lose 100c. After enough coin tosses we’ll end up with an equal number of heads and tails, and we would have made zero profit. Equally, we would have made zero loss. We’ll be exactly where we were when we started.

Now let’s add a coloured square on the ground, covering about a fifth of the total area where the coin is landing. If the coin lands in that square after we toss it, our profit or loss will be tripled.