Six simple ways to avoid a loss when trading Forex
No forex trader wants to have losing trades, but unfortunately they are part of the business. That being said, there are numerous steps any trader can take to avoid unnecessary losses and keep their trading accounts in great shape.
Here are 6 simple ways you can avoid taking losses when trading forex:
1. Pay attention to the news
Too often new traders come into the world of forex without truly understanding the dynamics of what really moves the market. They just slap their indicators on their charts and whenever a trade signal appears, they jump into the market fully convinced that they have a winner.
So, before you enter any trade make sure you know about any upcoming events that could swing the market against you.
2. Don’t risk more than you can afford
It’s a truism in almost all areas of life that higher risk means higher reward and in the world of forex the fastest way to reap larger rewards is by increasing your position sizes.
However, this can also lead to more losses because if your position sizes are larger, then that means that your stops need to be tighter in order to avoid risking too much on a single trade — and the problem with tighter stops is that they don’t give your trades room to breathe and increase the likelihood that you will be stopped out of a trade before it eventually moves in your direction.
Keep your position sizes small enough that you can set wider stops that will allow you to ride out short term moves against you.
3. Take profits when you have them
We’ve all been there: You open a trade and the market immediately moves the way you thought it would. The trade is profitable and you’re happy to let it ride and see how much more you can make, but then something happens and suddenly the market starts to move against you.
Your profits are slowly disappearing, but instead of closing out the trade, you decide to wait until the market moves before so you can recapture those lost profits.
However, the market never goes back your way. In fact, the market continues to move against you until it hits your stop and you take a loss.
How can you avoid this?
The answer is simple. Once a trade has moved in your direction by a reasonable amount, close out half of your position to lock in profits and move your stop to breakeven to ensure that you can’t possibly take a loss.
4. Keep emotions out of your trades
Emotions will destroy a trading account faster than anything else, so it’s important to keep them out of any trading decision. Too often traders will take a loss and immediately jump back into the market to make up for it without ensuring the market conditions justify the trade, or they’ll have a big win and jump back in to try and reap more profits even though the conditions that led to the original trade have passed. These are signs that a trader has allowed emotions to cloud their judgment and more often than not trades like these result in losses.
5. Use virtual trading to test out new ideas
Testing out new trading ideas with real money is a recipe for disaster. Before you ever even think about using an idea with your real account you should always test it out on a virtual account to protect yourself from taking unnecessary losses.
6. Don’t overtrade
When you start trading forex there can be this feeling that one should always be in a trade because if you don’t have a trade open, then you aren’t making any money. This often leads to overtrading and pointless losses as traders take the shotgun approach to trading and end up facing big losses.
Instead you should take a sniper approach. Don’t go chasing the market, rather sit back and wait until you see great setups and only trade those, because profitable trading is all about quality over quantity.