How Much Money Are You Willing to Lose on a Trade?

Is the speculative money that’s going into bitcoin coming out of commodities? It sure feels like it.

Last week, in my True Wealth newsletter, we hit our stops on commodities ranging from precious metals to cocoa – taking some small gains and small losses along the way.

Whether you are trading commodities or bitcoin, I urge you to use stop losses…

In short, before you enter any trade, you need to decide on the maximum amount that you are willing to give back – and you want to set that number up front and unemotionally.

Here are a couple examples from the trades we stopped out of recently…

Platinum hit a new low for 2017 last week. I recommended buying platinum in True Wealth earlier this year through the ETFS Physical Platinum Fund (PPLT).

But I set a tight stop loss. We hit that hard stop on Thursday for a loss of about 3.6% on the trade.

We also hit our trailing stop on cocoa last week. I recommended buying cocoa through the iPath Bloomberg Cocoa Subindex Total Return ETN (NIB), and I set a 10% trailing stop when we entered the trade. Since cocoa went up after my initial recommendation (and since trailing stops rise along with your stocks), we ended up exiting this trade with a gain around 4.1%.

The important lesson is, I got these two trades wrong – but it didn’t hurt me too badly. I stopped out before my losses got too big. I can easily live to fight (or trade) another day. No sweat.

What is your point of maximum pain?

What will you do when you get a trade wrong?

How much pain are you willing to take?

This applies to all your trades… especially on speculative assets like bitcoin.

What? You own bitcoin and you haven’t decided your point of maximum pain? What are you thinking?

How much of your money are you willing to lose? It’s real money.

Are you willing to lose 25%? 50%? 75%? 90%? All of it?

You need to decide this number – in advance – and stick to it.

I explained last week what I look for in a trade… I make sure the upside potential is dramatically larger than the downside risk I’m taking.

I strongly urge you to do the same.

Many commodity prices have hit new lows this year, while bitcoin has soared.

My losses in commodities don’t worry me, though… because I set my downside risk so low.

What about you? What’s your plan? How much money are you willing to lose?

Figure it out – in advance. Then stick to it.

Good investing,

Steve

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Source: Daily Wealth