Loss-making deal. Unprofitable transaction is a sign of obtaining an unjustified tax benefit Loss transactions of companies with state participation
A trader opens a terminal, an empty chart, except for a price chart, a terminal with no open deals, only a number looms in the balance column (10, 100, 500 or something else), everything is calm.
Absolutely at this moment, the trader is not worried about what news, where the price will go, but at least the whole world will turn upside down. The balance will be safe and sound and will not be lost anywhere.
In these minutes, the trader has full opportunities to earn, earn a lot. The main thing is to open up correctly.
Basically, you can do a technical analysis, you can listen to the news, read the newspapers, compare the opinions of different analysts and make a decision on which direction to open and on which pair.
The hope is always that the open trade will be correct and, in the end, will bring profit.
There is little doubt about it. 50 to 50. Either the trade is correct or not.
In such cases, I ask myself. Are there wrong deals?
On the one hand, the question is stupid and incomprehensible. How does it exist? If the trade is unprofitable, it is wrong. Because it is correct, it should be profitable.
Right. The good deal is right. Why isn't a profitable trade wrong? Because she made a loss.
Sorting out further, I begin to ask myself. And what, in such conditions, is considered a loss? Then, in theory, all transactions that a trader opens are already unprofitable at once. Due to the spread. It turns out that they are already wrong at once? Of course not. This loss does not count. Because it is too small and fits into the concept of tolerance.
What then should be the tolerance, the size of these losses, so that the transaction could be counted incorrectly?
Experienced traders can twirl their fingers at their temples. Like - well, actually. There are the concepts of setting a stop, there is a certain amount of risk per trade, there are, in the end, visions, levels - which can roughly show where the price will go down, where it will rise, where to walk back and forth.
That is, roughly speaking, the level of risk is the level of loss, after which the deal can be considered incorrect.
And the level of this risk is determined by the trader himself. By default, it is believed that the tolerance of 2 percent loss per trade from the balance is the line that most traders work close to. And so, please, you can set 5 percent, and for especially risky traders, even 10 percent.
I may sound annoying, but the wrong trade is obtained by one trader who works with a risk of 0.5 percent, is considered correct by a trader who works with a risk of 2 percent. It turns out that two identical deals, for the same instrument, concluded at the same time, at the same price, at the same volume, are considered correct by one trader, and incorrect by the other.
It seems to be returning to the theme of "50-50" again. Not very clear. What if my risk of 90 percent is considered normal?
Then, let me ask you why very often some traders point out to others that they are not trading correctly, that is, they are entering into the wrong deals.
Therefore, I want to say right away that my opinion is that there are no wrong, and, therefore, unprofitable transactions. All trades are correct and profitable. Well, maybe except for those that happen in moments of disasters, force majeure and the like.
But why? For example, just a person who bought $ 1 in the bank. Or 1 franc. Is it possible to call this purchase so that it is not the right purchase, the deal? Of course not.
Why are such actions considered a mistake in Forex?
Moreover, any price will return someday to where it was, and a losing trade easily turns into a profitable one.
Here the main argument against is that such a return of the price can be expected for a year and five years, maybe even ten. Can. But in theory, the fact remains. There are no unprofitable, incorrect transactions.
As for the time when a trader does not have time to wait a year for all trades to become profitable - this, excuse me, is already the trader's job. It is his task to make it so that this process is neutralized, to remove the deal while it is unprofitable, since there is no time, to create his own trade so that the profit will be frequent and fast. But that's another story, and here this task is very difficult, often leading to real losses.
It often happens that a new line of products is launched on sale even before the products of the old one are completely sold. Or simply the demand for the product has dropped significantly, or maybe the company is developing a new market segment. And then the product is sold at heavily discounted prices. But many accountants are afraid to reduce the selling price below the purchase price, since this is allegedly prohibited by law and is fraught with additional taxes. Let's see if this is really so.
Fear 1. Selling below cost is prohibited by law
In general, the contracting parties themselves determine the price of the goods. An exception is prices that are regulated by the state, for example, in the field of electricity, gas supply, communications.<1>... So for a regular contract on the part of the GC, there is no lower price limit. The main thing is that this price suits both parties.
The Federal Antimonopoly Service also monitors prices in order to prevent abuses of the "big players" in the field of pricing. However, companies that are not able to influence the price situation on the market by their actions alone or with a group of other companies have nothing to fear<2>.
Note. In 2013, the FAS drafted amendments to the Law on Trade Activities, advocating a ban on sales at a price below cost, but the project did not find support in the government, was sent for revision and has not even reached the State Duma yet.
Output
If your company does not have a decisive influence on the pricing of the market and does not sell goods for which prices are regulated by the state, then there is no lower price limit.
Fear 2. Loss on sale at a price below cost is not recognized for tax purposes
Let's say right away that this is not the case. The tax base for profit is calculated cumulatively for all transactions<3>... And only if a special procedure for calculating the tax base is established, income and expenses on these operations are calculated separately. For example, a special procedure is provided for transactions with securities<4>... In addition, there is an outright prohibition on recognizing in expenses the price difference between the market price and the selling price of the product to the employee. If you sold the product to an employee at a non-market price, which is even lower than the purchase price, then it is obvious that such a price difference is formed and, in fact, it represents a loss when selling below cost.<5>.
But with regard to other transactions of purchase and sale at a loss, there are no special rules. Therefore, it looks like this schematically: the income for all transactions is summed up and all expenses from the sale recognized in the reporting period are deducted from the amount received.<6>... Obviously, the proceeds from the loss-making transaction will be recognized in the sales proceeds together with the proceeds from other sales, and the expenses on it will be recognized together with the expenses on the remaining transactions. If you are not systematically working in the red, then it is generally unrealistic to find unprofitable trades. They will simply drown in the general mass, and they will not be seen in the income tax return.<7>.
With the "profitable" simplification, the sale at a loss does not in any way affect the amount of tax: how much money was received for the product - from that amount and calculated<8>... If the simplified "income and expense", then in this case it is not so easy to track a loss-making transaction, income and expenses on it can generally fall into different accounting and even tax periods. After all, expenses are recognized as the goods are paid to the supplier and sold, and incomes are recognized upon receipt of money from the buyer.<9>... When selling goods to employees, the price difference between the retail price and the selling price is also not included in the expense.
Output
Tracking a losing trade is unlikely if you are not systematically negative. It is unlikely that the tax authorities will do this, because the loss from sales, if the goods are sold not to employees, is still taken into account for tax purposes.
Fear 3. If the sale price is lower than the purchase price, the tax authorities charge additional taxes based on the market price
There is some truth in this judgment. It all depends on whether such a transaction is controlled. Let's say you sold apples at a price lower than a purchasing third-party Russian company. Then you can safely look into the eyes of the inspector, since the price of a transaction between parties that are not dependent on each other is initially considered to be a market one.<10>... That is, the tax authorities will not check your prices for compliance with their market prices. Simply because this type of verification is provided only for controlled transactions, and transactions between independent Russian organizations do not belong to controlled ones.<11>.
Note. "But what about Article 40 of the Tax Code?" - you ask. Despite the fact that the notorious Art.40 of the Tax Code on market prices has not yet been canceled, its effect has been significantly narrowed: it applies only to those transactions for which income and expenses were recognized before 01.01.2012. That is, at the moment, tax authorities can try to recalculate taxes based on market prices only if the "sale" took place in 2011, since 2010 and earlier periods can no longer be covered by the on-site audit scheduled in 2014 G.<12>
But if you sold the goods at a non-market price and such a transaction is controllable for you, for example, you sold apples for mere pennies to your subsidiary on OSNO, the amount of income from transactions with which exceeded an uncontrolled threshold (in 2013 - 2 billion rubles, in 2014 - 1 billion rubles)<13>, then in this case you will have to<14>:
<или>to prove to the tax authorities at the "price" check that the apples were impossible to sour and the transaction price fits well into the price range at which such goods are sold by non-dependent persons<16>... If the tax authorities nevertheless consider that the prices were not comparable with the market prices, then after the "price" check they will go to court in order to collect arrears and penalties on income tax and VAT<17>... And if the proceeds from the transaction relate to 2014, then the tax authorities may also impose a fine in the amount of 20% of the amount of unpaid taxes.<18>.
We tell the head
If the seller independently calculates and pays taxes at the market price on income from a controlled transaction, then the buyer will not be able to recalculate the tax base downward. After all, he will have such a right only if, after checking prices and paying the seller the arrears, the buyer receives a notification from the tax authority to carry out symmetric adjustments.<20>.
But sellers' transactions on the simplified taxation system do not fall under price control, since such organizations do not pay either income tax or VAT, for which additional charges are possible during "price" checks<19>.
Output
The claim that taxes will be recalculated based on market prices is only partly true. It all depends on whether the transaction is considered controlled. If so, you will have to prove to the tax authorities that the transaction price is comparable to the market price. If not, then there is no need to be afraid of additional charges.
Fear 4. Expenses for the purchase of goods sold at a loss are economically unjustified, and therefore they cannot be taken into account when calculating income tax
Every commercial organization, by definition, seeks to make a profit<21>... However, one-time unprofitable transactions also fit into this concept, because the desire to systematically make a profit is fraught with risk and does not exclude a loss. In addition, by selling today at a low price, the company insures itself against an increase in losses in the future, therefore, the management assesses the profitability of the transaction at the current moment.
Note. In what cases transactions between interdependent persons are not considered controlled, you can read in the article "On interdependence and controllability frankly": GK, 2013, N 21, p. 66
The Tax Code does not give tax authorities the right to assess how effectively they manage capital, and therefore the concept of "economic feasibility of expenses" should be considered through the focus of expenses on generating income<22>... And in the example with apples, the costs of purchasing goods were economically justified, because, firstly, they were not purchased for a charity event, but were going to be successfully sold, with a profit. Another thing is that the circumstances have changed somewhat and now it is much more important to release the circulating assets frozen in an unsuccessful batch of apples. And secondly, they still received income, because there is some kind of revenue.<23>... And no one is insured against losses<24>.
You can do the following to validate your expenses. First, the manager must issue a markdown order. Second, the markdown must be justified. For example, you can attach to the order the conclusion of a commodity expert or a sales manager that apples of last year's harvest, it is impossible to store them for more than 1 month in your warehouse, and if the presentation is lost, the losses from write-off will be much higher, etc. In any case, the justification should indicate for what purpose and why you decided on a losing trade. All this will help you to strengthen your position in the event of a dispute with the tax authorities.
Output
The costs will be economically justified if they were aimed at making a profit. The end result is not critical.
Fear 5. If the goods are sold at a loss, then VAT cannot be deducted for them
The tax authorities are inclined to see an unjustified tax benefit in an unprofitable transaction, because the deduction upon acquisition was greater than the alization of the goods. And all because the reasonable economic goal of concluding a tax loss, accrued during a retranslation transaction for the tax authority is not at all obvious. And as we remember, its absence is one of the signs of receiving an unjustified tax benefit.<25>.
Therefore, just as for justifying expenses, you need to stock up on arguments in your favor in advance. The same documents will do: the order of the head, the conclusion of commodity experts, financiers, etc.
In litigation, the case is resolved in favor of the taxpayer if he provides the court with evidence of a reasonable economic purpose, which was pursued when concluding an unprofitable transaction<26>... But if there was no such goal, and by all indications the organization is a participant in the tax scheme, then do not expect mercy from the tax authorities. In addition to an unobvious economic goal, the controllers will also reveal other signs of obtaining an unjustified tax benefit, for example, the inability to fulfill the contract. For example, an organization purchased a consignment of goods, and where it was stored for a whole month is not clear, since the organization does not own or lease storage facilities, and although the responsible storage agreement was concluded, it was not executed<27>.
Output
A tax benefit in the form of a VAT deduction on goods sold at a loss can be justified if the organization proves that it pursued a reasonable economic goal in concluding the unprofitable transaction, for example, to avoid even greater losses from the complete write-off of the goods. But if the goods were sold only on paper and there were no real transactions, then the tax authorities will remove such deductions.
* * *
So, of all the concerns considered, the most real is the withdrawal of expenses and deductions. To prevent this from happening, prepare a cost justification in advance. And if, God forbid, you are a participant in a tax scheme, then only fake documents without real transactions are unlikely to help you.
<1>clause 1 of Art. 424 of the Civil Code of the Russian Federation; clause 1 of Art. 4, art. 6 of the Law of 17.08.95 N 147-FZ; sub. 4 p. 2, p. 4, art. 8 of the Law of 28.12.2009 N 381-FZ
<2>h. 1 tbsp. 5, part 1 of Art. 7, p. 1 h. 1 art. 10 of the Law of 26.07.2006 N 135-FZ
<3>clause 1 of Art. 274 of the Tax Code of the Russian Federation
<4>clause 2 of Art. 274, art. 280 of the Tax Code of the Russian Federation
<5>Clause 27 of Art. 270 of the Tax Code of the Russian Federation
<6>clause 1 of Art. 247, sub. 3 p. 1, p. 3, art. 268 Tax Code
<7>clause 2 of Art. 268 of the Tax Code of the Russian Federation; Letter of the Ministry of Finance dated 09/18/2009 N 03-03-06 / 1/590
<8>clause 1 of Art. 346.15, paragraph 1 of Art. 346.17, paragraph 1 of Art. 346.18 of the Tax Code of the Russian Federation
<9>clause 1 of Art. 346.15, sub. 23 p. 1 of art. 346.16, p. 1, sub. 2 p. 2 art. 346.17 of the Tax Code of the Russian Federation; Letter of the Ministry of Finance dated October 29, 2010 N 03-11-09 / 95
<10>clause 1 of Art. 105.3 of the Tax Code of the Russian Federation
<11>clause 1 of Art. 105.17, paragraph 1 of Art. 105.14 of the Tax Code of the Russian Federation
<12>paragraph 4 of Art. 89 of the Tax Code of the Russian Federation
<13>sub. 1 p. 2 art. 105.14 of the Tax Code of the Russian Federation
<14>paragraph 4 of Art. 105.3 of the Tax Code of the Russian Federation
<15>nn. 3, 6 Art. 105.3 of the Tax Code of the Russian Federation
<16>sub. 1 p. 1, p. 3, art. 105.7, p. 1, 7 Art. 105.9 of the Tax Code of the Russian Federation
<17>Clause 5 of Art. 105.3, sub. 4 p. 2 art. 45 of the Tax Code of the Russian Federation
<18>clause 1 of Art. 129.3 of the Tax Code of the Russian Federation; clause 9 of Art. 4 of the Law of 18.07.2011 N 227-FZ
<19>sub. 1, 4 p. 4 art. 105.3, paragraph 2 of Art. 346.11 of the Tax Code of the Russian Federation
<20>clause 1 of Art. 105.3, p. 1, 2 tbsp. 105.18 of the Tax Code of the Russian Federation
<21>clause 1 of Art. 50 of the Civil Code of the Russian Federation
<22>Art. 252 of the Tax Code of the Russian Federation; Definitions of the Constitutional Court of 16.12.2008 N 1072-O-O (clause 2 of the motivational part), of 04.06.2007 N 366-O-P (clause 3 of the motivating part), of 04.06.2007 N 320-O-P (clause . 3 motivational parts)
In business practice, situations are possible when a firm is forced to sell goods at a loss, below cost. A typical example is the sale of products that are not in demand.
Such operations traditionally attract increased attention of the fiscal authorities. As a consequence, a careful approach to the economic justification of prices for such transactions is required. In a crisis and a decline in demand, when transactions at a loss occur more and more often, the problem of justifying them becomes even more urgent.
Inspector's right
According to Art. 40 of the Tax Code of the Russian Federation (hereinafter - the Tax Code of the Russian Federation), the tax authorities have the right in certain situations to control the prices of transactions and, if prices do not correspond to market prices, to charge additional taxes based on market rates. In accordance with paragraph 2 of Art. 40 of the Tax Code of the Russian Federation, we are talking about:
- transactions between related parties;
- commodity exchange (barter) transactions;
- foreign trade transactions;
- transactions, the prices for which deviate by more than 20 percent in the direction of increase or decrease from the level of prices applied by the taxpayer for identical (similar) goods - (works, services) within a short period of time.
Accordingly, if the transaction price deviates by more than 20 percent upward or downward relative to the market price of identical (homogeneous) goods (works or services), the tax authority has the right to charge additional taxes based on the market price (clause 3 of Article 40 of the Tax Code RF).
In paragraph 2 of Art. 40 of the Tax Code of the Russian Federation, there is no direct indication that the fact of sale at a price below cost is the basis for verification. However, such sales cannot be considered ordinary, since they contradict the foundations of entrepreneurial activity. And the lack of economic feasibility is one of 109 signs of bad faith of the taxpayer, developed by the Federal Tax Service. Thus, even if the price of a losing transaction does not deviate by more than 20% from the usual prices used by the company, problems in relations with the tax authorities are still possible.
reference
The criteria for the bad faith of a taxpayer were developed by the Federal Tax Service at the beginning of 2007. The order under the heading "For official use" contains 109 signs, according to which inspectors are ordered to identify tax violations. Here are some of them:
1. The company's registration address is the address of "mass" registration (that is, 10 or more companies are registered on it). At the same time, there is a statement from the owner of the premises that the premises for rent were not provided to anyone ...
4. The application for registration indicates invalid identity document applicant, founder or manager ...
14. An individual is a founder of 10 or more companies ("Mass" founder) …
38. Company presents "zero" tax or accounting statements within one or more tax periods.
All information about taxpayers available to tax authorities is entered into a special federal electronic database "Legal entities controlled in the first place", abbreviated as YL-KPO.
It is obvious that almost any company can detect 30-40 “dangerous” signs in itself. Inspectors are well aware of this, so the criteria are weighted differently. The position of a particular company in the YL-KPO list depends on a set of its criteria - the more there are and the more significant they are, the higher the place in the rating.
Anticipate loss
What reasons can force a company to start trading at a loss. Here are just the most common ones:
- low demand for the product,
- general decline in prices in the market,
- miscalculations in the determination of the purchase price, which led to the impossibility of making a profit during the subsequent sale of the goods.
These circumstances are intended to confirm the existence of conditions under which a sale at a loss is justified. Each of these factors can be considered as an independent basis, but their joint evidentiary power increases significantly. The documentary evidence can be a market analysis carried out in-house or ordered on the side. The results of the study must be drawn up in the form of a report, on the basis of which a memo is drawn up (see Example 1), which explains the need for a sale at a loss. In the memo itself or in the appendix to it, it is advisable to provide calculations showing that such a sale will avoid further losses. The decision to reduce the price is approved by the order of the head (Example 2).
Example 1
Example 2
In addition to cases where the low selling price is due to market conditions, there may be situations when sales create a loss in the current period, but ultimately lead to a positive financial result in the future. For example, if a company expects a counter-purchase from a customer due to the current delivery. However, it should be borne in mind that such a scheme can be regarded by the tax authorities as a conspiracy aimed at reducing tax liabilities.
However, as the courts point out, tax legislation does not provide for the determination of the financial result for individual transactions for tax purposes, and if a profit is made at the end of the reporting (tax) period, then there is no reason to talk about the existence of a “scheme” (see Example 3).
Example 3
According to the decree of the Federal Antimonopoly Service of the Moscow Region dated June 29, 2007 No. KA-A40 / 5388-07-A, B, the tax inspectorate is not entitled to draw conclusions about an intentional reduction of the tax base based on the financial result of a particular transaction. In addition, if the inspectors made a decision on additional tax assessment, since, in their opinion, the transaction amount did not correspond to the real one, they must provide the court with evidence of the conducted research of market prices and their discrepancy with the price of a particular transaction.
Nevertheless, the above position of the court does not mean that one can neglect the documentary justification of the price for such transactions. At a minimum, it will reduce the risk of tax disputes. The rationale must confirm that the future economic benefit cannot be achieved by any means other than selling at a reduced price. As in the previous case, it is advisable to formalize the justification in the form of a memo and the corresponding calculations.
Additional mechanisms that traditionally make it easier to justify low prices are discounts and premiums. But in relation to unprofitable transactions, the use of discounts and premiums has its own characteristics.
Discounts and premiums
In its economic sense, a discount is the amount by which the previously announced price is reduced. Arbitration courts adhere to a similar position.
Example 4
As the FAS ZSO pointed out in its resolution dated 21.08.2006 No. F04-3446 / 2006 (25284-A27-33), the concept of “discount” is absent in the current tax legislation. At the same time, in the contractual relationship, a discount means the amount by which the price of goods is reduced when the buyer fulfills certain conditions.
According to paragraph 3 of Art. 40 of the Tax Code of the Russian Federation when determining the market price - discounts caused by:
- seasonal or other fluctuations in consumer demand,
- loss of quality or other consumer properties by goods,
- expiration (approaching the expiration date) of the shelf life or sale of goods,
- marketing policy, including when promoting new products to the markets that have no analogues, as well as when promoting goods, works, services to new markets,
- the implementation of prototypes and samples of goods in order to familiarize consumers with them.
In principle, each of these conditions, to one degree or another, can be the basis for the sale of goods at a price below the cost price.
However, not all cases of sale at a loss are covered by the circumstances specified in paragraph 3 of Art. 40. They concern only the following cases:
a) a sale at a loss will lead to income in the future - (promotion of goods, implementation of prototypes and samples),
b) the sale at a low price is of a short-term nature - (fluctuations in demand, loss of quality, expiration of the shelf life of the goods).
It is unlikely that the drop in demand during the crisis can be unequivocally qualified as seasonal or other fluctuations in consumer demand. This position is, to say the least, highly questionable and therefore carries significant tax risks.
In this regard, the use of discounts cannot be recommended as the main mechanism for establishing a low, unprofitable price in a crisis and falling demand. It should be confirmed, first of all, by a report on the results of market research and other documents mentioned above. Discounts only help to make it easier to justify a low price.
Discounts that do not reduce the price are included in accordance with sub. 19.1 clause 1 of Art. 265 of the Tax Code of the Russian Federation, in the composition of non-operating expenses accounted for for tax purposes of profit as a discount for the fulfillment of certain conditions of the contract. They are not part of the price, in their relation to the rules of Art. 40 of the Tax Code of the Russian Federation do not apply. At the same time, they are checked by the tax authorities for the validity of inclusion in the composition of expenses - according to the rules provided for in paragraph 1 of Art. 252 of the Tax Code of the Russian Federation.
In order to avoid contradictions, it is advisable for the company to use the term "discount" in its documents only in relation to the reduction of the price of the goods, and the amounts that are paid to the buyer for the fulfillment of certain conditions of the contract or reduce his debt are called a premium. Thus, the legal norms will be observed and, at the same time, the economic sense of the discount will be preserved.
The contract (or an additional agreement to it) must formulate conditions, the fulfillment of which gives the buyer the right to receive a premium, for example, the volume of purchases, early payment, etc.
It is advisable to record the fulfillment of these conditions in a bilateral act, in which it is necessary not only to state the fact of fulfillment of the conditions, but to indicate when and what conditions are met, by what primary documents (invoices, etc.) this is confirmed, when and in what amount the premium will be provided ... The act allows, in the event of a tax audit, to more clearly and clearly substantiate the economic feasibility of providing specific amounts of premiums.
The bonus can either be paid or provided without payment, by reducing the buyer's payment arrears. In the latter case, instead of a bilateral act, you can limit yourself to a credit note from the supplier. This is indicated in the letter of the Federal Tax Service of Russia for Moscow dated March 21, 2007, No. 19-11 / 25335.
Unlike discounts, there is no mention of marketing policy in the Tax Code for premiums. However, the consolidation of the methodology of bonuses in it should be recognized as expedient. This is also indicated by the tax authorities (letter from the Federal Tax Service of Russia for Moscow dated 03.07.2006, No. 19-11 / 58863).
With regard to the applicability of the premium as the main tool for setting a low, unprofitable price, the following should be taken into account. The purpose of entrepreneurial activity is to make a profit. The provision of bonuses is carried out within the framework of this activity, therefore, it should not contradict this goal. It is doubtful that a premium that covers the economic benefits from the sale of a product is consistent with the goal of making a profit. The only exception can be the relationship between the provision of the premium and the planned income from the relationship with this buyer, for example, the conditionality of the premium by counter purchases at a low price. But for other situations, the premium as a mechanism for establishing a losing price is hardly acceptable. Moreover, the method of granting a premium - payment or reduction of debt - does not fit well with the unprofitableness of the transaction.
Losing trades for professional traders are nothing less than the price they pay to do business. Professional traders exit unprofitable trades without any worries, fully focusing on adhering to their risk management rules, their formed trading and money management systems.
The ability to correctly exit losing trades is just as important a part of trading on the exchange as winning trades themselves. Losing trades can instantly turn from failure into a real disaster, so it is in your best interest to learn how to quickly and calmly get out of such situations, preventing serious damage to your trading account.
Below we present three powerful strategies for exiting unprofitable trades... In most cases, these techniques will help you get by with minimal losses while preserving your trading capital for the next trade.
Strategy # 1: Exiting a trade after closing outside the established trendline
Rally Bitcoin in October-December 2017, it opened several safe breakout entry points to chart-savvy traders at once. The chart below shows traders' last chance of making a good profit before the price dips until December 18, 2018.
Pay attention to the prerequisites of the setup before buying:
- A long series of higher lows and swing highs (HH, HL), which indicates an upward trend.
- The Simple Moving Average (SMA) has gone up - a serious indicator of an uptrend.
- The price tag fell slightly, touching the dotted uptrend line (blue arrow), and then quickly rebounded, breaking even above the previous high of the consolidation.
- The day after the breakout Bitcoin rose by almost $ 2,000, then quickly fizzled out and dived below the uptrend line until December 19, 2018
Anyone who took this breakout as a buy signal had to act as quickly and aggressively as possible to get out of the situation as a winner. However, even simply exiting the trade immediately after the price tag fell below the trend line, one could get by with minimal losses.
Always remember that a close outside a long trendline is one of the clearest indicators of a trend reversal. In such cases, the market gives you an unambiguous hint that your trade setup failed and you need to exit the trade as soon as possible.
Main conclusions
- Established trend lines, particularly those with an angle of attack of 45 degrees and above, often act as powerful support (or resistance) lines.
- When a price tag reverses and closes outside such a trendline, it most likely means a reversal of the previous trend and the beginning of a new one.
- If your long or short position fails to close on the other side of such a trendline, close the trade immediately to avoid risking more losses.
Strategy # 2: Closing a trade when the stop loss is reached
Trading against the trend- a fairly popular strategy for scalpers (lovers of quick money on cryptocurrencies that are slightly ahead of themselves). As a rule, the earnings on winning trades are about the same (or slightly less) than losses on losing trades, so for such a strategy to be viable, at least 70% of trades must be winners.
In the example pictured below, BTC / USD has been falling for four consecutive sessions with a wide spread between the high and low of each bar. These signs indicate serious selling pressure. However, some countertrend practitioners see this as an ideal buy setup, especially when the third period relative strength index, RSI (3), closes below 10.00 on the 4th down bar. In this case, the bar that caused the close RSI below 10.00 is a setup bar and any rise above this level is considered a signal for a long entry.
Trend reversal - a signal to action
In this case, the trade is not gaining much momentum and instead results in smaller losses. Please note that you need to exit the trade as soon as the stop loss level is reached, not the close level. It is critical for a countertrend trader to exit a losing trade immediately instead of waiting for the bar to close. This method insures you against cases when the price continues to move in the wrong direction, which can lead to even greater losses.
You should never hope that a losing trade will suddenly change its course and become profitable again. Instead, accept your losses as soon as trading rules hint at an unwanted outcome. Thus, you will preserve your personal trading capital and sanity.
Key findings
- Trading against the trend is a good strategy, but it is important to avoid large losses here.
- Always keep the initial stop loss slightly outside of the extreme trade setup
- When trading against a trend, it is important to exit the trade as soon as the stop loss is reached in real time, rather than waiting for the closing bar to be reached.
- Always stick to your stop loss point unless you want to turn modest losses into serious losses.
Strategy # 3: Closing a trade after a certain number of bars
Sooner or later, every trader may find himself in a situation where the position on his favorite coin does not give any signals at all. The price tag is in a "sluggish" position, rising and falling in a small range and absolutely not making it clear about their future intentions. What to do in such a situation when neither target profit mark nor stop loss mark?
One solution to this dilemma is using a time stop... By analyzing the historical behavior of the price tag of a given coin, you can understand how long you will have to wait until the next breakout after such a stagnation. For example, if low volatility consolidations usually resolve within 12 bars or less, you can schedule a dead trade to exit at the close of the 13th bar after the initial trade entry. This way, you free up your trading capital to use in a different, more compelling setup.
In the above example, BTC / USD formed triple pattern(1B, 2B, 3B) showing positive MACD momentum / price divergence and then quickly broke above the key trend line. All of these attributes indicate the ideal opportunity to enter a long position. However, the shares stopped their movement there, not reaching the target profit and at the same time not falling below the stop-loss point. Volatility continued to fall, and with the closing of the price corridor at the tenth bar, the ideal step would be to exit the trade using a time-stop.
By closing the trade in this way, the trader could have saved himself from the fourth low (points 4B on the chart). Moreover, his capital would be free to use in more promising setups. At the time of this writing, BTC / USD is still in a lifeless state with extremely low volatility in the seven-week trading corridor, just starting to show some signs of life.
Key findings
- Even a perfect setup may not produce the desired results.
- If, after a significant period of time, the trade has not reached the target profit or stop loss mark, close the trade.
Conclusion
Knowing how and when to close a losing trade separates systematically winning crypto traders from eternal losers. Your long-term success as a crypto trader will to a large extent be determined by your ability to get by with minimal losses, regardless of the number of successful trades. Three simple techniques presented in this article will help you develop this important skill.
Disclaimer : Do not take this article as investment advice. Do a thorough analysis before investing in any cryptocurrency.
For trading on the cryptocurrency market Husky Cue Ball recommends the exchange!
The desire to avoid losing trades, in fact, dramatically reduces the potential for profit. Let's take a look at why.
At first glance, this is contrary to common sense. How can a trader's desire to avoid losing trades be considered a mistake? Losses take money from us and reduce the sizetherefore, it is only natural that people try to avoid losses. But many aspects of trading seem counterintuitive. This natural tendency hurts you as a trader. Let's look at why this is so, and how you can increase the profitability of your trading if you allow the possibility of losing trades.
Trading statistics and the erroneous tendency to avoid losing trades
Trade statistics include the most common indicators such as the percentage of winning trades (in relation to the total number of your trades) and the profit / risk ratio (how much profit you usually take on a trade and how much you usually lose).
Suppose you are offered a game in which you can win 55% of the time, and your winnings will be 1.5 times your potential loss. What strategy will you choose in this case? You know that when you play for a long time, your capital is likely to grow.
You bet $ 10 and you lose. Will you continue to play? Bet another $ 10 and lose again? And now? Another 10 $ and you lose again. Most people in such a situation will question the advisability of such a game. They have lost money, admit they are defeated, and decide to try their luck elsewhere. The losses incurred discouraged them, and they made a fatal mistake (of course, we assume that the person who offered the game was not cheating).
This fatal error consists in the fact that they stopped playing or switched to some other game (in the case of trading, they changed the strategy). If you continue to play, then with a large number of bets (or with a large number of trades for a strategy with such statistical parameters) you will have a significant probabilistic advantage. 55% of winning trades means that out of every 100 trades you will win 55 times and lose 45 times. These winnings and losses can be distributed in different ways. In theory, you can get 55 wins in a row, followed by 45 losses, or vice versa. But the 55% ratio will remain unchanged. You have lost three times in a row, but someone else won three times in a row. Although you know your odds, wins and losses can be randomly distributed within these limits. Basically, one trade is a coin toss. The statistical advantage manifests itself in a large number of trades.
People trust statistics when they are not playing. But when they put real money on the line, they suddenly begin to think that the statistics may be wrong, someone is cheating them, or they simply do not want to expose themselves to the risk of losing even more (psychologically, a loss is more significant than a win of the same size).
At the very beginning of our game, we agreed on the percentage of winning trades and the reward / risk ratio. Both of these metrics were good for you. This is analogous to the fact that a trader who has been working out his strategy for several months to achieve stability, makes trades every day and records their results.
After six months of profitable trading, he sees that his winning percentage and reward / risk ratio on 756 trades (good sample size, 6 trades per day) are 55% and 1.5: 1, respectively.
Now this trader knows that he is likely to lose money 45 times out of every 100 trades (approximately). Should three trades in a row turn out to be unprofitable, should this be a cause for concern? No. In fact, losses can be seen as a path to profitable trading. This trader knows that if he sticks to his trading plan (which has proven to be successful over six months of trading), he will ultimately reap the benefits of the statistical advantage inherent in him.
In our example, such a statistical advantage can bring the following results (based on an account balance of $ 5,000, 126 trades per month and a risk of $ 50 per trade (1%)):
126 x 0.55 = 69 winning trades x $ 75 = $ 5175 *
126 x 0.45 = 56 losing trades x -50 $ = -2800 $
Net profit = $ 5175 - $ 2800 = $ 2375
* The size of a winning trade is $ 75, based on $ 50 risk and reward / risk ratio = 1.5
$ 2375 is a monthly profit on his account of $ 5000, if you adhere to the trading plan (you need to take into account more commissions).
We cannot know in advance which trades will turn out to be profitable.
It should be borne in mind that a trader will only make a profit if he adheres to his trading plan. This means that he will have to lose money in about 56 trades every month (at our assumed level of probability) in order for the other 69 trades to bring a profit of $ 2375.
It is impossible to know in advance which trades will turn out to be profitable and which ones will turn out to be unprofitable. If we knew this, we could achieve a higher probability of success. But we only know the average figure - 55%.
A trader will make a mistake if he supposes that he can avoid some unprofitable trades (if they were made in accordance with the strategy used). Trying not to lose, he will most likely inadvertently miss some of the profitable trades, and they will cost him 1.5 times more than the unprofitable ones.
A missed profitable trade does more harm than a not perfect unprofitable trade saves.
In our example, trying to avoid a $ 50 loss could reduce the potential net profit ($ 2375) by $ 75. Thus, each missed profitable trade eats up part of the reward that awaits you at the end of the month. In our example, with a 55% probability, each missed trade could be profitable. That is, you would rather miss a winning trade than avoid a losing one. It is clear that such a trader's behavior will only reduce the effectiveness of his trading.
As a result, trading may even become unprofitable, since by skipping part of the trades, the trader will no longer trade according to a proven profitable strategy that he has been working out for a long time. The variable parameters have changed, which means that the result will change completely.
Output
We hope that by taking into account the above examples, you will no longer consider losing trades as bad. Losses are an integral part of any trading strategy that produces the results you expect at the end of the month - but only if you make all the trades it suggests (if your strategy has been proven to be profitable). It is impossible to know in advance which trades will turn out to be profitable or unprofitable, but you can.
Market conditions change over time, so trading statistics will fluctuate.So, in our example, a trader in one month may have more than 126 transactions, in another - less, depending on the opportunities that appear on the market. Accordingly, his monthly profit can also be more or less. But on average, he can expect to earn $ 2,375. We also assumed that a test sample of 756 trades is sufficient to work out the strategy. Perhaps this will not be enough. In any case, trade for several months on to find out your statistics and get the opportunity to be part of the United Traders team of traders, and then trust these statistics when you switch to live trading.
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