How to minimise losses in forex trading
In forex, a trader can increase his or her initial capital several times over a very short period of time. But on the other hand, there is the same risk of losing all your investments. To avoid painful losses, you need to learn how to manage risks.
How to cut your losses in Forex?
Let us review the basic methods of risk management in Forex:
1. making sure you use stop-loss orders; 2. trading a small part of your deposit; 3. the trend is your friend. Transactions are only made on the trend; 4. Psychology and management of emotions.
Let us study these aspects in details:
1. Protective stop-loss order. Professional traders have the following expression "limit losses and let profits grow". What does it mean? It means do not sit and wait for the price to go against the direction of an open position. Many people look at the chart and think that the price has already gone too far and needs to turn around. But the problem is that the price does not owe anybody anything! The market determines the trend direction by itself, and it determines where the trend will change, so it is not wise to sit and wait until the reversal point is reached or not. It is easier and more economical to always put a stop loss and cut losses.
2) Trade a small part of the deposit. You should not open transactions with the maximum possible lot. Yes, this way you can double your deposit in a few minutes. But, the first wrong trade leads to total loss of all money. That's why trading should be protected as much as possible from a period of failure. If you allow yourself the chance to make a few mistakes, and in this market mistakes always happen, you can continue your trading afterwards.
3) Trade on the trend Trend trading is also one of the key methods of limiting your risk. Yes, you can enter when the trend is over and the market is about to change direction or go flat, but trading against the trend is risky. The beginners, looking at the historical charts, see that they could buy at the low and sell at the high. In practice, however, this is very rarely the case. As a rule, all profitable forex strategies give an entry point when the price has already passed some part of the movement. It is better to lose a little profit than to take a loss.
4. Psychology. This is the last factor we will consider here, but it does not mean that it is not the most important. Psychology is the key point in achieving success in trading. Even having a profitable system you may be afraid of losses all the time, cutting off profitable positions thus failing to gain profit. Or you can wait for the price to reverse holding unprofitable position and thus increase your loss even more.
The considered issues of loss minimization in trading are common and crucial to success. But without a profitable trading system, risk control will not help you make money, although this is not its primary purpose.
Limiting risk in the first place is designed to keep losses at bay. If you learn to cut your losses in forex, you will very soon learn how to make real money, but this requires you to minimise your risks and keep your deposit.
Successful trading with low risks!