What is an optimal loss and why are they part of this process.
Trading, or deploying risk capital contains a fair amount of uncertainty. We will take losses, that is inevitable. What can be, and should be avoided at all costs, is letting those losses wipe you out.
Let’s go through an example of an OPTIMAL LOSS.
GBPZAR – We took a SHOT LONG at this trade last week. It did not work, this is the chart:
Our BUY level was 20.8300, with a 20.7750 STOP LOSS. We RISKED 1 UNIT (for the sake of the example, lets assume 1 UNIT is $1,000.)
Here is how the trade looked after we got long at 20.8300 and were stopped at 20.7750.
Our size (based on those parameters) was GBP 275,000.
[(20.7750 – 20.8300) X 275,000] / 15.10 (USD/ZAR) = (1,001.66).
That was an optimal loss considering the subsequent move to 20.4450. The scenario if we would have stayed in the trade would be as follows:
[(20.4450 – 20.8300) x 275,000] / 15.10 (USD/ZAR) = ($7,011.59).
is it frustrating to take a $1,000 loss, absolutely, but this prevents us from nursing a losing trade and potentially wiping out weeks of good work.
Optimal Losses are a PRIORITY FOR ANY PROFITABLE PROCESS.