Dealing with your losses is one of the most important FOREX trading strategies in order to keep your losses as small as possible. Learning how to cut Forex trading losses, you can outlast those times when the market moves against you, and be well positioned for when the trend turns around.
The one proven method to keeping your losses small is to set your maximum loss before you even open a Forex trading position.
Remember, the goal here is to keep our losses as small as possible while also making sure that we open a large enough position to capitalize on profits and minimize losses. With your money management rules in place, in your Forex trading system, you will always be able to do this.
Forex trading strategy 1: Set your maximum loss
The maximum loss is the greatest amount of capital that you are comfortable losing on any one trade.
With your maximum loss set as a small percentage of your Forex trading effort, a string of losses won´t stop you from trading for any particular amount of time. Unlike the 95% of Forex traders out there who lose money because they haven´t implemented wise money management rules to their Forex trading system, you will be ok with this money management rule.
To use as an example: If I had a Forex trading float of $2000, and I began trading with $200 a trade, it would be reasonable for me to experience three losses in a row. This would reduce my Forex trading capital to $800. It would then be decided that they’re going to bet $400 on the next trade because they think they have a higher chance of winning after having lost three times already.
If that trader did bet $200 dollars on the next trade because they thought they were going to win, their capital could be reduced to $500 dollars. The chances of making money now are practically none because I would need to make 150% on the next trade just to break even.
If the maximum loss had been determined, and stuck to, they would not be in this position. In this case, the reason for failure was because the trader risked too much money, and didn’t apply good money management to the play.
Forex Trading Strategy 2: Cut your losses short
This is actually the sister rule to the one mentioned above, and is usually just as difficult to do (even if it is very easy to define). In the same way that profitability comes from a few large winning trades, capital preservation so comes from avoiding the few large losers that the market will see fit to send you each year.
Setting a maximum loss point before you enter the trade so you know ahead of time approximately how much you are risking on this position is pretty straight up.
You just have to have an exit price that tells you that your trade is a losing one you should exit before it gets any bigger. Because of gaps at the open, or limit moves in futures we can never be 100% sure that we can get out with our maximum loss, but simply having the rules, and always sticking to them will save us from the nasty trades that just keep on going against our position until we have lost more than many winning trades can make back.
If you have a losing position that is at your maximum loss point, you should just get out right away. You can´&t; hope that it will turn around for as it isn’t common sense.
Being that trades are either winners or losers, and this one is shouting “Loser” at you, the chances that it will turn around and become a large winner is decidedly small.
Why would you want to risk any more money on a trade that has already shown itself to be a loser when you could simply close it out (accept the loss) and move on. This will leave you in a much better place financially and mentally, than holding on to your position and hoping it will go back your way.
Even if it did do this, the mental energy and negative feelings from holding the losing position are just not worth it. this is why you should always stick to your rules and exit a position if it hits your stop point.
Do not rely on advice from strangers because it is not their responsibility when you lose. It is only your own responsibility. Therefore it is a wise decision to invest the time necessary learning how to keep your losses in Forex trading as small as possible. Use every trade in order to increase your knowledge.