Any successful investor will tell you that risk management is the most important aspect of buying and selling assets for a profit. As Warren Buffett, considered by many to be the greatest investor ever who has profited in the foreign currency markets has stated, “Rule number one is do not lose money. Rule number two is repeat Rule number one.” Imperative to this is fx charts that determine the most profitable entry point and exit point for transactions.
Without establishing the trigger points for buying and selling, no amount of technical analysis utilizing any fx chart will be successful. There is one area where it might seem that punters have a superior position: taking small profit from each trade makes totally unnecessary a detailed analysis for the proper entry point and exit point. When the punter determines an opportunity, a buy is transacted with the sell a short time later after a rise in the price (hopefully).
But for punters, that means missing out on the largest profits and exposing their strategy to the largest losses.
It also entails exposing oneself to the most risky form of trading, no matter the financial exchange. Study and study reveals that the great majority of day traders and other short term buyers and sellers end up losing money. For those, the expression, “Little profits, big losses” was created. Those looking for small profits often get hammered by larger market forces developing.
Risk management is impossible when the entry points and exit points are so close together, which is a necessity for punters and day traders. By their very nature, punters and day traders seek to profit from speculating. As defined by Benjamin Graham, founder of the value school of investing and the inspiration for Warren Buffett, speculators seek to profit from the conditions of the market.
Due to the efficiencies of modern financial exchanges, speculators are doomed to failure. That is why so many end up losing everything. What appears to be inefficiency for a speculator to book a quick profit actually turns out to be a larger market force at work. That immediately results in loss for that trade for the speculator.
Sensing an even larger inefficiency developing that will result in even bigger profits, the punter doubles down and places more trades. As a trend in the market is developing, this position too is wiped out, with the losses mounting. If the day trader had been utilizing leverage for trading, as many do, the losses are magnified even more which makes it even more difficult to recover. Should a margin call result which cannot be covered, the assets of the punter will be liquidated in a very costly fashion.
From this is where the “Big profits, little losses” are what separates the punters who end up broke and the investors who end up as billionaires. Fundamental to this is the determining of the proper entry point and exit point, if there is to be one. In her book, “Hedge Hunters,” Katherine Burton wrote that the most successful asset managers were right about 55 to 60 percent of time.
What made billionaires of those buying and selling asset classes such as foreign currencies was the ability to quickly sell the losing positions and hang on to the winners. For this successful trading, entry and exit points must be calculated at every step. As Warren Buffett has stated about his investing, “Long term is forever.” In that case, the exit point might be never, or “to be determined.”