Risk Management – When to Cut Losses?

No matter what your experience in forex is, you have to work really hard to minimize the possible losses. It is far from a one-time deal since you are required to follow your risk management strategy on daily basis in order to grow your forex trading profits.

Unfortunately, most beginners and even quite a few experienced traders are simply unable to control their emotions and let the greed take over. The result is quite tragic – these unlucky traders grasp the losing trades in hopes that the market will astonishingly turn around and make all of this misery just a bad dream.

Some even more unfortunate traders not just hope but start changing their stop loss levels without decent explanation or logic.

Greed. This is one of the major challenges to overcome. In order to fight it, the trader must perform the following checkup:

• Recognize a bad trade.
• Exit the Bad Trade no matter how large the temptation to stay in and hope for the best is.

Realization

But, first thing first. How do you recognize a bad trade? What are the signs of a seemingly good trade gone wild?

• Too Close to Potential Reversal Point

If you put a long order at a resistance level or put a short order too close to a support level, you are in trouble.

• News Release

Certain news releases can be catastrophic to your trading day, making the price of the currency pair traded go completely opposite to the open position.

• Same, but Different

If you see that the open trade isn’t performing good and the currency involved doesn’t do any good in other pair combination, it is time to pull that plug and get out.

Action

Now that you have detected a losing trade, the next step is necessary – quit that trade as soon as possible. This requires a lot of psychological strength since when your money is involved and you were planning to today, it is hard to realize that things might not be going your way today after all.

Get out of the trade and walk away from the computer. Go take a relaxing shower, meet with your friends for lunch, take your dog for a walk and watch Grey Anatomy (not necessary in that order, and not necessary Grey Anatomy… just an example which works well for me!)

You see, once you lost money, the only thing you will be thinking of is how to recover from this downfall. You will seek trading opportunities in unjustified situations. You will long to trade more to “cut losses”, you will go out of your mind with more bad trades!

The only solution is to close the trade immediately and walk away. Don’t ever try to win that money back immediately, because that will only cause more loss. Do the damage control and take time out. Tomorrow is another day. Tomorrow your head will be clear again to make a proper analysis of the market and make logical decisions.