Top 5 Tips To Limit Losses In Forex Trading | Everything Trading

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Top 5 Tips To Limit Losses In Forex Trading

Oct 22, 2019 | Blog

Top 5 Tips To Limit Losses In Forex Trading

Tip 1) Always Set A Stop-Loss Order

Tip 2) Money Management

Tip 3) Accept It When You Are Wrong

Tip 4) Hedge Your Positions

Tip 5) Continually Look To Perfect Your Strategy

 

 

“Confidence is not ‘I will profit on this trade’. Confidence is ‘I will be fine if I don’t profit from this trade‘.” ― Yvan Byeajee, The essence of trading psychology in one skill

 

 

Being able to limit your losses on trades that go negatively to your bias is an essential skill in Forex trading – it is something that professional traders continually look to perfect, as to enable them not to blow their whole account balance. It is commonly known within the industry that many new new retail traders come in and out of the market, blowing their account within a matter of days… This is down to a lack of education and not following a few simple rules to keep their ‘head above water’ whilst on losing trades/streaks. 

 

The main aim of the game in Forex trading is to limit the losses on losing trades and to maximise profits on winning trades. In this article, we will be going over 5 simple tips that we recommend you following (or to at least be aware of) in order for you to limit any potential losses – staying in the game long enough so you can have that lovely win streak, pocketing all them PIPs!

 

Tip 1) Always Set A Stop-Loss Order

A stop-loss order is an order type in Forex trading that caps your loss if a trade goes negatively against your bias and reaches a certain predetermined price point. By setting a stop-loss order you are essentially asking your broker to close your position once a trade goes to a certain negative level where you want to cut your losses.

Anything in the Forex market can happen, if you do not set a stop-loss order who is to say that you definitely won’t blow your account? A huge move in the negative direction could occur, and within a matter of seconds you could potentially blow your account by NOT setting a stop-loss. 

*Note* we recommend that you do not move your stop-loss order once the trade is active. We always believe that you should follow your original trading plan. Your trading plan should be continually reviewed in your trading journal, with the amount of risk being scrutinised and hence where to place your stop-losses on every future trade… You never know, if you move your stop-loss order whilst a trade is active – you may make a lot less then if you were to have left it.

Setting a stop-loss order is super easy. If you would like to find out more information on what a stop-loss order is and how you can set one up in your trading set-up, check out the third step in our free Forex course.

 

Tip 2) Money Management

Money management is the art of incrementally increasing and decreasing the associated risk on trades in order to limit losses and maximise profits. Money management is a pivotal component of a trading plan, by having a basis of what you should be risking per trade.

There are two main money management strategies that are commonly used amongst Forex traders; the fixed percentage method and the fixed money method.

The fixed percentage method involves risking the same percentage on every trade. So, for example, you want to risk 10% of a £100 trade, which is equivalent to £10. If you would lose this trade, your new account balance would be £90. Therefore, risking 10% again, would now mean that you would be risking £9, and so on..

This strategy is good for new traders as it is useful in limiting overall losses when on a losing streak. However, more experienced traders tend to prefer the fixed money method, which involves risking the same monetary amount on every trade. So, for example, on every trade you make – no matter if you had won or lost the previous trade – you want to risk £10.

This strategy is useful when on winning streaks, as you are not limiting your potential profit, unlike on the fixed percentage method, where you are incrementally risking less on losing trades – making it harder to break even when on winning trades.

Regardless of what method you may want to choose, it’s important to have some kind of money management strategy, so you can stay on top of what you are risking on every trade and thus decrease the risk of blowing your account.

To combat this you could indeed use the fixed money method. This method involves risking the same monetary value of every trade, for example £10, no matter if you win or lose trades. This method works if you are confident that you will win more than 51% of your trades, ensuring that you will not blow your account if you lose the first 49% of trades in a row.

 

Tip 3) Accept It When You Are Wrong

Sometimes a trade will go negatively against you, and this trade may look like its not going to stop going negatively against you. In this type of situation it is sometimes commendable to accept that you had made the wrong decision to open this position and to close it taking a loss. As opposed to being stubborn and keeping open this position, where you eventually lose much more by not accepting that you were wrong earlier.

This is a hard decision to make, and truly you never do know if it is the wrong decision or not. However, this is something that you can continually work upon and understand as a trader the more experienced you become.

 

Tip 4) Hedge Your Positions

Hedging is a technique utilised by many experienced traders. It is a strategy that involves opening a the same or closely related currency pair in the opposite decision to your original bias. Hedging is useful as it offsets the risk of price fluctuations and reduces unwanted exposure to currencies from other positions.

 

As example of hedging;
You have opened a long GBP/USD position… You want to hedge this position as this currency pair is currently experiencing high volatility, therefore you decide to open a short EUR/USD position.

 

Tip 5) Continually Look To Perfect Your Strategy

No matter if you win or lose a particular trade, you should enter all the details of that trade into your trading journal and understand why this particular trade moved the way it did, and if you had done anything wrong / could you have done anything better?

It is important to continually perfect what you are doing in order to limit losses. When you are on your best game, you can take into account all the small factors that go into making a trade and you can stand back and see what you can do to perfect your strategy and better your risk management plan.

It is important to understand that to be a consistent Forex trader you need to continually limit your losses. This is one of the most important traits that you can have and can seriously help you in your long-term trading success. We believe that you can make loads of PIPs, just make sure that you don’t blow your account in the meantime!

 

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