This is a guest post by Elizabeth Goldman
There’s no denying that forex trading is an exciting way to make money. You can get a return on your investment in a matter of minutes if the market goes your way. It is inevitable however, that you will take some losses, but if managed correctly they can form part of a successful strategy. Here, we will look at different methods for dealing with losses.
Control Your Emotions
Lack of emotional control and mental discipline is the main cause of failure among online traders. Lots of accounts are wiped out early because traders act like scared animals in the highly charged atmosphere of the markets. Many more won’t reach a stage where understanding statistics and economic data can help produce better profits. Controlling your emotions, therefore, is an important part of managing losses.
To successfully trade forex, you need to isolate emotions while dealing with the markets. Markets move by emotions but logic is needed to analyze those movements correctly. You need to step back and look at the bigger picture. Study the figures, plot charts and only move when the time is right. Don’t be tempted to rush in.
Avoid Minor Currencies
Stick to the major currencies when trading forex. Smaller currencies are riskier because they fluctuate more than larger, more stable currencies. Avoid potential losses and trade the American dollar rather than the Norwegian Krone. Remember that smaller currencies will also be more expensive to buy because they are illiquid and are traded in lower volumes.
Trade with a Stop-Loss Limit Order
Trading with a stop-loss order will help prevent large forex losses. This will tell your broker to sell a currency when it reaches a certain price e.g. setting a stop-loss order for 10% below the price you paid for a Euro order will limit your loss to 10%.
Use a Take-Profit Order
Take-profit orders are used by currency traders to lock in profits should the currency move in their favor. It specifies the exact rate or number of pips from their current position to where they can close out for a profit.
Trade with a Plan
Do not rush in. Start by examining charts which will give you more information about the currencies you want to trade. Look at the 5 second, 1 hour, and 1 day charts to understand how a currency might move in a trading session. Technical and fundamental analysis are also worth looking at to help look for possible long-term trends.
Avoid Trading Lots of Pairs
Trading lots of currencies is asking for trouble. You will spend too much time looking at charts and not enough time tracking your investments. Keep it simple and focus on a few pairs. More currencies increases the risk as there’s a chance one will drag all your investments down.
If you notice a downward trend early on in your trading, cut your losses and get out. Do not continue losing money. A stop-loss order will help in these situations.
It is important to keep a record of losses to be always updated with a currency’s development and avoid any future mistakes. Keep a notebook specifically for forex trading and make a chart with the following titles:
- Trading date
- Beginning balance
- Number of trades
- Pairs traded
- Strategies used
- Ending balance
- Forex trading losses