Do you have a forex trading strategy that you stick to religiously?
What’s your biggest trading mistake?
Do you have one trap that you fall into again and again? Mine is knowing when to stop.
I love making money from my trading, but even more, I just love trading. I suspect, as you’re reading this, you do too. So, how do we know when to stop? We need to apply some discipline.
Firmly apply the following forex trading strategy to minimise your losses
When to cut your losses
Opening a trading position is easy – you look for your signals, you decide on your risk, and you press the button.
Knowing when to close is considerably harder.
How do we know if we should genuinely close a position, or if we’re just suffering a case of trader’s jitters?
Let’s say you entered a long trade, and the value of that instrument has shot down, leaving you feeling decidedly uncomfortable.
Jumping out of this position now is what a gambler might do.
But we’re traders – not gamblers.
Take a look at the set-up that got you into this position in the first place – what was the story that caused you to buy? Whether it was based on technicals or fundamentals, or both, there should have been a signal that caused you to open this trade.
Are those signals still in place, or has some news or technical indicator negated them?
For example, perhaps the price has fallen through an important support level that was part of your set-up. Or perhaps your trade was based on fundamentals, and earning figures have been released that were worse than expected.
These are the kind of reasons to cut your losses.
If, on the other hand, the story that led you into this trade is still in place, then you should stick with your position.
Let’s say you bought a stock that you believed to be undervalued. In the meantime, the price drifted downwards. Unless some evidence emerged that your original valuation was flawed, there is no reason to exit this trade.
That’s not to say that you allow your losses to run indefinitely. If the losses that you are running on a trade becoming excessive in relation to the size of your portfolio, you should close that trade (I’d hope that with sound money management and a sensible stop loss, you’d not have to reach this stage – more on automated stops in a moment).
When to close a winner
It can be just as tricky knowing when to close out a winning trade – although it’s generally a more pleasant problem to have.
Let’s say you have a trade in place that’s in profit, but languishing some way from its profit target.
Much like with a losing trade – we have to look at the set-up that got us into that position in the first place. Is the story still in place or has something happened to negate those signals?
If a crucial part of that story has changed, then we should consider closing that trade and taking our profits off the table.
And – just as it’s important that we don’t allow our losses to become excessive in relation to our portfolio – nor should we be sitting on huge, unrealized profits. Your profits and losses on open trades are real money – don’t fall into the trap of leaving them floating in the ether, vulnerable to further risk.
The time factor
The time it can take trades to play out can be torturous. Trading involves an endless amount of patience, plus nerves of steel.
However, we shouldn’t ignore the time element of our trades as simply a necessary evil.
The longer our money is tied up in a trade:
– the more time that money is at risk in the market;
– the less time we have to use that money for other investments;
– the greater our financing charges will be.
Before you enter a trade, you should have factored in a timescale that you’ll give that trade to play out.
You don’t want to find yourself wasting considerable time waiting for your trade to achieve the last couple of points to your profit target – sometimes it’s better to take your profits, and move on to the next trade.
Remember – trading is about keeping your money working hard for you.
I haven’t yet touched on the value of automatic stop losses and profit targets in controlling our trades for us.
The fact that you can open a trade and stipulate at what profit or loss it will be closed, is a great way to manage your positions and remove some of the emotional wrangling over whether to hold or close.
I use stops and targets in most of my trading. Sometimes no more parameters are needed. However, most trades can benefit from additional management – and that’s where the discipline, steely nerves and patience come in.
Personal stops and targets
Just as on a trading platform, your trade automatically closes when a certain level is hit – I have my own trading levels at which I’ll stop trading.
What do I mean by that?
Well, for each sessions’ trading, I have a personal profit target in mind, and figure I’m prepared to lose. Once either of those levels is hit – I log out of my trading platforms and get on with the rest of my day.
This regime stops me from slipping into behaviour patterns where I gamble away my winnings in the belief that I’m ‘on a roll’; or getting deeper into the red by trying to win back losses.
It also enables me to have a life away from the trading screen – something my family appreciate!