A while back there was an interesting TV series called “Breaking Bad”. It focused around Walter White; a chemistry high school teacher who breaks the conventional society rules to survive.
To survive in the stock market you follow the “Breaking Even” rule. Trading is all about probability i.e. chances of the stock price going up, down or sideways.
The best probable action you take determines your success in the trading business. It requires you to protect your capital with a defensive guard at all times.
What is a Break Even trade?
When a stock position is closed with a minuscule gain or loss, it’s called a break even trade. For someone trading daily, a 0.1% or 0.2% gain or loss might be considered as a break even trade. Mostly traders like to at least cover the commissions before closing the trade as break even.
General consensus among trading community is you either win or lose a trade. But to survive for the long run, it’s imperative to add break even trades in the mix.
Example Winning Trades
The trade is closed at the potential target or due to market circumstance and price action, trade is closed with gains before the target is reached.
Example Breakeven Trades
The trade is exited in the close vicinity of entry price. If the stock starts to move in the intended direction after exiting at break even, you can always reenter with a new trade.
Example Losing Trades
The trade is stopped out or price action warranted an earlier close resulting in smaller loss.
Try this proven formula to become profitable in the stock market
Net Gain = (win a few big trades) – (break even few trades) – (lose small)
$150 = $300 (2 trades) – $40 (3 trades) – $110 (2 trades)
There were only 2 good trades among 7 total trades, but it still resulted in net gain – The Power of defensive trading using breakeven strategy.
I use to find trading very hard until I realized it’s not about always winning in this game. An important aspect of trading as business is to know losing is inherent with trading – you only have to win little more than losing to sustain and come out on top.
And break-even is key to maintaining the balance. When the trade is not going in your favor or something doesn’t look right, get out. Break-even trades opens up the room for new possibilities on new trades. Sitting and hoping that the stock moves in your favor is recipe for failure in trading business.
People should read this article and follow the method.
Lately there are lot of break-even trades with your system compared to the last few months. What has changed – the markets or your algorithm?
Your analysis of the results is accurate. There have been more break-even trades overall. If you look at the markets off late, they are trading nearly in flat line with some volatile new highs here and there. Low summer trading volume coupled with geo-political news (Brexit, Election, China, etc.) is resulting in very limited up or down move in stocks. This leads to more break-even trades. It always behooves to get out at break-even or small loss rather than hope for a turn around.
Do you find more break even trades on a slower trading day compared to other days? I find it a lot safer to get out at even rather than see getting chopped around – helps minimize stress level.
Hi – yes, on a slower trading day there are more break even trades than any other day. The market does not have enough participants/momentum to lift the stock higher or lower, so it drifts sideways. It’s better to exit at break even or close to entry price rather than wait and hope.
Couldn’t agree any more with the importance of break-even. More than half of my trades are scratched (even exit) and I still end the day in green.