We all trade to make money. We focus our attention on the trades we made a huge profit on and we sweat over the ones that lost us part of our account. Breakeven trades don’t get so much attention.
But what the majority of traders don’t realize is how important they actually are.
First, let’s agree on what a “breakeven” trade is, so that we can place it in context and understand its importance fully. We understand it as a trade that ends at the price where the profit and loss equal zero.
Although these trades don’t advance your bottom line, they do serve a crucial function – preserving capital for a better opportunity.
Achieving profits all the time is impossible. Chasing a winner all the time in trading is part of the reason many traders fail and give up. The road to consistent profits goes through a lot of losing and breakeven trades.
There are two types of breakeven trades. The first is when a winning position turns into a breakeven one by retreating from a price that would’ve made you money.
A very frequent scenario is when the market moves in line with your prediction immediately after you open the position but it reverses shortly after that and either hits your stop-loss order at the breakeven point, or you close the position manually to prevent losses.
The second type of breakeven trade is when an initial losing position manages to perform a partial turnaround and reaches your opening price or somewhere close to it.
It usually starts with the market behaving in the exact opposite way to your prediction, then it does e 360’ and reaches your opening level. That’s where you close the position at breakeven, before the price continues going even further against your initial prediction and reaches your original stop loss.
Keeping losing trades open is something that we’ve all done and managing them can lead to lower losses. But there are risks involved.
Hoping that a losing position will turn itself around if you give it time rarely works. Cutting losses early is okay and should be performed more often than not, especially if it can be done at breakeven.
Monitor yourself during and after your breakeven trades, both coming from a winning and losing position. You were either strict and disciplined and followed your trading plan (regardless if it worked or not), or you let your emotions take over and starting doing chaotic things driven by fear or greed.
Whatever happened, try to make that experience count and make notes of it in your trading diary, so that next time a breakeven scenario unfolds you’ll be better prepared.