Have you ever considered that your success or failure as a trader hinges on just three possible outcomes? While technically only two outcomes—winning or losing—are often considered, there’s a third one that plays a crucial role in your trading journey. It’s easy to think that with a 50% chance of success, more traders would be profitable. Yet, the reality is stark: 90% of retail traders fail in the forex market, leaving only 10% who manage to succeed. So, what happens to the other 40%? Why do they end up on the losing side when the odds seem so evenly split?
While the failure of many retail traders can be attributed to a myriad of mistakes, this article will show you how something as fundamental as understanding the outcomes of a trade can be the key differentiator between success and failure.
The Three Outcomes: Win, Lose, or Break Even
Every trade you take has three possible outcomes: win, lose, or break even. Most beginners are familiar with winning and losing trades. A winning trade is when the market moves in the direction you predicted, either hitting your take profit level or allowing you to manually exit with a profit. A losing trade is when the market moves against your prediction, hitting your stop-loss level or forcing you to manually exit with a loss.
But what about the third outcome, the breakeven trade? This outcome often gets overlooked, yet it’s a vital tool in a trader’s arsenal.
Understanding the Breakeven Trade
Imagine you go long (buy) on a currency pair and set a stop loss below your entry point. As the market moves in your favor, you see a significant gap between your entry point and the current price. To protect your gains, you move your stop loss to the entry point, ensuring that you won’t lose any capital if the market reverses. If the market does reverse and hits your new stop-loss level, you exit the trade at breakeven—no profit, but no loss either.
A breakeven trade doesn’t result in a win or a loss; it’s a neutral outcome. However, this neutrality can be powerful when used correctly. It’s essential to practice proper trade management before adopting a breakeven strategy, as moving your stop loss too soon could cause you to exit a trade prematurely, missing out on potential profits.
The Power of Breakeven Trading
Breakeven trading is particularly valuable in volatile markets where price retracements are common. By moving your stop loss to breakeven after a trade moves in your favor, you protect your capital from these temporary market fluctuations. This approach can be especially beneficial for swing traders and long-term investors, where trades are held over days or even weeks.
Consider this scenario: You enter a short (sell) position, anticipating a price drop. The market initially moves in your favor but then starts to retrace. By moving your stop loss to breakeven, you protect yourself from a potential loss if the market reverses completely. In contrast, a trader who doesn’t use a breakeven strategy might incur a loss on the same trade.
The Compounding Effect of Breakeven Trading
Let’s break this down further. Suppose both you and another trader start with $100 in your accounts, risking 1% per trade. If you both enter the same trade, but you exit at breakeven while the other trader takes a loss, your account balance remains at $100, while the other trader’s balance drops to $99. If you both capitalize on a subsequent trade that yields a 10% return, your account will grow to $110, while the other trader’s account will only grow to $108.90. Over time, these small differences can compound significantly, especially on larger accounts.
This example illustrates the cumulative advantage of breakeven trading. While trailing stops are popular among traders, they can sometimes cut profits short during minor retracements. Breakeven trading, combined with manual trade management, offers more control and the potential for greater long-term gains.
The Psychology of Trading Outcomes
Each trading outcome—win, lose, or breakeven—carries its own psychological weight. Winning trades often bring positive emotions, while losing trades can evoke negative feelings. Breakeven trades, on the other hand, tend to be met with neutral emotions. However, the psychological impact of a breakeven trade can be profound, as it reinforces disciplined trading and capital preservation.
Incorporating breakeven trades into your trading journal is crucial for future review. The order of your results—whether you win, lose, or break even—should not affect your psychological state. If you adhere to proper risk management, you’ll find that breakeven trades can be a valuable part of your overall strategy.
Final Thoughts
By now, we hope you’ve gained a new perspective on the different trading outcomes. These simple yet often overlooked concepts can make a significant difference in your trading success. It’s not just about winning or losing; it’s about managing your trades effectively and understanding the power of breakeven outcomes.
To further solidify your knowledge, make sure to read our article on trade management. This will help you grasp the importance of disciplined trading and how to implement these strategies in your trading journey.
Remember, success in trading isn’t just about making profits—it’s about protecting your capital and making informed decisions that keep you in the game for the long haul.