Good Forex Trading Technique may involve taking loss! Don’t you believe that? Let us explain in this article.
Most seasoned Forex traders will be more than happy to tell you about their big winning trades, but not so many will be forthcoming about their worst losing situations. Nevertheless, how you lose money as a Forex trader can be even more important than how you go about making it.
For example, failing to cut losses on a losing position can easily wipe out the trading account of a forex trader who does not have deep pockets and plenty of patience. This is the case due to the high volatility and unexpected market moves often seen in the Forex market.
Less harmful to a trader’s account by a considerable degree, although still clearly significant, will be how well they manage their winning trades. The following sections will cover some of the key elements of why good Forex trading technique involves taking losses promptly and while they are still at a manageable level.
Good Forex Trading Technique: Taking Losses Early
Virtually all traders have to go through tough times where a string of losses seem to appear from out of nowhere. This phenomenon can often cause great distress, especially among new traders. Without a proper money management strategy, a string of losses could be enough to put a trader out of business, and in many cases it has.
Professional traders generally keep well aware that they may run into a series of losing trades, which is why virtually all profitable trading plans contain a money management component. This key part of any trader’s system will usually include such items as how to perform position sizing and where to place stop loss orders to manage risk.
Losing Trades: Cut Your Losses Short
By cultivating a reasonable fear of losing more money, this tends to prompt a trader to take immediate action to get out of losing trades at a small loss, thereby leaving them free to re-assess the market.
This would be a typical response for a more experienced trader who has learned – perhaps the hard way – that taking a small loss right away is far better than swallowing a large one that may develop by waiting.
In addition, depending on the flexibility the seasoned trader has in their trading plan and mentality, they might even choose to reverse their original position. They would do this by closing the initial trade and positioning a new trade on the opposite side of the market than they had originally dealt.
This sort of mental flexibility often requires considerable cultivation, but it can be extremely helpful when trading a market that disagrees with your original directional assessment of it.
The Moral of This Article is – Use Stop Losses
Many experienced Forex traders will regularly place stop loss orders as soon as they initiate a trading position. This provides them with an effective way of limiting any trading risk to their portfolio that might come from an unanticipated adverse market movement.
While some traders do prefer to watch their stop loss levels themselves instead of entering orders with a forex broker, this can result in a costly loss of trading discipline, so it is usually not recommended for newcomers to forex trading.
Managing Trading Risk With Stop Orders
Just about any forex trader who wishes to avoid watching the forex market constantly when they have a position will want to consider leaving stop orders in the market to help them manage their risk.
The types of stop orders most commonly used by forex traders to manage risk on trading positions are stop loss orders and trailing stops. The following sections describe in greater detail how a trader might use each of these important order types.
Using Stop Loss Orders
Stop loss orders are those placed in the market at a rate worse than the prevailing rate and are used to limit the risk on a trading position in case the market moves against it.
Stop loss orders are usually executed at the best possible price available in the market once the set order level has traded. The difference between the order level and the actual level the stop loss order is filled at is known as slippage.
Traders familiar with basic technical analysis methods will typically place stop loss sell orders on long positions below support levels, and stop loss buy orders above resistance levels when going short. This strategy helps protect the stop loss order from being executed and gives the original position a greater chance to become profitable.
Furthermore, a number of other technical indicators are often used in addition to support and resistance levels to set stop loss levels. These indicators include moving average crossovers which can give a trader a sense of when a market has reversed its prevailing trend. Some traders also use pivot points to set stop levels.
Basically, stop loss orders have saved many a trader from what would otherwise have been steep losses. Nevertheless, for every wise trader that has saved money by using stop losses, many more people that are no longer trading, have not.
Using Trailing Stops
The technique of trailing stops become useful once a position has become significantly profitable. The process involves moving the existing stop loss level on a position to a better level – ideally beyond the trade’s breakeven point – in order to lock in profits.
Overall, trailing stops give a trader the benefit of protecting profits made previously. They also allow the trader to continue holding a profitable position in a trending market until the market turns, in which case the stop order will automatically liquidate the position to protect whatever profits have already accrued.
The important motivation behind using trailing stops is to let your profits run. Using this strategy allows traders to stay with a position for a major currency move after having gotten in at a good initial level. Such a situation could have a long term trend trader holding a position for months – making outstanding profits in the process – until the stop is eventually executed on a market reversal and their profits realized.
Of course, when the trend eventually reverses and the trade is stopped out this represents the perfect opportunity for the trader to calmly reassess the market and determine whether or not they wish to reenter. They might then choose to get back on the same side of the market, or perhaps take a contrary position if the market has shown substantial signs of reversing further.
The Bottom Line
Remember that some broker’s trading condition may conflict with your risk management system. We recommend you to trade with a broker like HYCM, who has friendly trading conditions that will help you to get going with almost any kind of risk management system. Read more on this broker from HYCM Broker review.
|Chapter 9||Money Management in Forex Trading|
|Lesson 1||money Management Tips|
|Lesson 2||Good Forex Trading Technique|
|Lesson 3||Using risk-reward ratio in Forex trading|
|Lesson 4||How to use leverage|
|Lesson 5||Forex Trading Risk management|