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Forex trading is all about making money, however, it is crucial to have plan B in case an entered trade doesn’t meet your expectations. Minimizing your losses is the most important money management you can ever have.
The first thing that every beginner should realize that not all trades will be profitable and there is nothing you can do about it. Buying the “magic” automated systems that bring 210% profit without losing a trade for just $99 will not only result in the loss of $99 but most likely of your whole trading account.
Without cutting your losses short and letting go of bad trades, you might end up in a situation from which you cannot recover. So instead of searching for a magical solution and fast money, the best thing you can do is to decrease the chances of losing too much. Once you understand this concept, your trading experience will be much smoother and profitable.
Below are the signs of getting out of the trade:
2% Rule
Before trading, you have to set the percentage of risk you are willing to take per trade. It is widely accepted not to go over 2% of the total account funding. Whenever you go over that mark, the red light should light up and you should close your trade immediately no matter what you think might happen in the next couple of seconds.
Stop Loss
Setting stop loss based on different chart patterns, indicators, and signals received after analyzing the market is the most common way to minimize risk.
Stop-loss orders should be decided before you enter a new position. This will decrease the risk of not being patient enough, taking profit too early or sticking to a bad trade.
Where to place stop loss? Here are a couple of ideas:
Place stop loss at a point where you forecast a change. Many traders place stop loss point below the most recent swing low or the most recent significant swing high. In case the market doesn’t follow your predictions, you will safely get out from the trade and rethink the current market situation.
Even if you did come out from a profitable trade by mistake, there will be tones of other opportunities to make money. Forex doesn’t sleep and new pips are easy to make. What you don’t want to have is an empty trading account. Then no matter how much more opportunities strike, you won’t be able to participate!
Stop loss is the most important thing in risk management. It doesn’t let a mistake turn into a complete disaster. Never think about trading without setting well-defined stop loss.
End of Day – End of Trade
Day traders base their exit strategy on time. The strategy is simple – they don’t carry a balance over to the next day no matter how the market acts.
Avoid Correlations
Try not to hold positions in two currencies that tend to move together, such as British Pound and Euro. These two currencies usually move in the same directions therefor there is not much action going on for you!
Gambling is a No-No!
Leave your gambling experience and urges for the poker nights with your buddies. If you lost with previous trades, don’t start hunting for opportunities that do not exist and don’t double your risk in order to win back what you have lost. It doesn’t work with forex trading, no matter how good you might be with online casinos!
