Reduce losses in your trading
How Not To Lose Money When Forex Trading
When it comes to playing the financial markets, forex trading will always be a very popular option because it’s easy to get started and there are very low margin requirements – so you can get going pretty quickly with small amounts of capital and start bringing home the Benjamins.
But, as much as it’s true that there’s a lot of money to be made, there’s also a lot of money to be lost… and you’ve got to be prepared for this, putting in the hours so you can mitigate the risks but also preparing yourself mentally and emotionally for those inevitable financial hits.
Celebrate the wins, yes, but learn from the losses and try not to take them to heart. It’s all a learning curve, after all, and the losses will help you improve your trading game… even if you can’t see it at the time.
That being said, it also makes sense to do all you can to avoid losing money when FX trading. After all, the game is all about making money at the end of the day – so here are some top tips to help you keep your hard-earned cash where it belongs… in the bank!
Practise, practise, practise
As with anything, the key to success is practice when it comes to foreign exchange trading so find yourself a demo account and start placing those hypothetical trades. This will really help you improve your entry order techniques and strategies (those you use to enter a trade at a specified price level).
This can be pretty complicated because there are so many variables that affect the forex market, so practising when you’re not financially invested can help you work out what you need to do and when without any added pressure.
Making mistakes with entry orders can result in big losing trades and it’s really common for new traders to accidentally add losing positions instead of closing the trade – all by pushing the wrong button by mistake.
When you suddenly see a big loss, your confidence will take a hit and your stress levels will rise… and trading is all about keeping a cool head, no matter what happens – which is why practice is so very essential and something that all the most successful traders will no doubt have done, as well.
Start off small
Of course, it’s tempting to go all in when you first go live as a trader. That’s where the excitement lies, after all. But, even with all the practice in the world, things can still go wrong and you’ll still be relatively new to the trading floor so be sensible when first starting out and don’t put everything you have on the line.
Real trading has a very different feel to it than when you’re in the practice room and you won’t gain a full understanding of how emotion can impact your actions until you’re trading live.
You may also find that your trading plans and strategies just aren’t as effective in the real world as they were when using your demo account, so starting small can help you evaluate everything and really see where you’re going wrong and what you can do to rectify it, without risking your entire trading account.
Focus on money management
It might seem boring and arduous, but effective money management is an absolute must if you’re to see real success as a trader. Losses are absolutely inevitable, so it’s important to monitor your positions constantly and take the hits when they happen.
You can control the risks through stop losses, an order type designed to limit the losses from a trade. This means you can be wrong numerous times and still retain the majority of your equity – and this is certainly a better approach than having to learn a few harsh lessons when your finances seriously suffer.
You can manage your money either by implementing lots of small stops and then trying to rake in profits from a couple of big wins, or you can opt to take infrequent bigger stops and try to make smaller gains that build up over time, in the hope that these will outweigh any of the larger losses you see.
Overtrading is very common among FX traders. The thrill and the excitement of it all keeps you coming back for more time and time again, and before you know it you’ve amassed some serious losses… all because you couldn’t restrain yourself.
Work smarter, not harder, so they say – and this is a great rule of thumb to bear in mind when trading currencies. Experienced traders may well see consistent profits over time, but taking on too many trades generally only leads down a dark path and you’ll spread yourself too thin, which will have an inevitable impact on your profits.
Increasing profit is basically just about reducing and preventing your losses – and one of the best ways to go about this is to trade less frequently.
The trend is your friend!
This is a really popular trading expression and one you’re sure to hear bandied about when you start trading yourself. Trends are simply prolonged movements in the market in one general direction – up or down.
For traders, this means that price responses can become predictable at levels of support or resistance, which change over time – and you can use trend analysis to look at what took place in the past to gain an idea of what’s going to happen in the future.
However, your successes and failures where trends are concerned will depend on one thing – understanding that the trend will end at some point. You’ll never know how long they’ll last and the key is to learn how to identify them early on so you can take advantage sooner rather than later… and so you can get out again without sustaining any losses.
Trade one strategy at a time
Of course, it’s tempting to want to try out all sorts of different strategies at once but, again, you’ll spread yourself too thinly and it will be harder for you to track and see what’s working most effectively.
It makes more sense to pick one strategy and really get to grips with it, before trying something new. You’ll see greater success with this approach and you’ll reduce your risk of blowing your entire trading account.
Preserve your trading capital
Playing a strong defensive game is essential for any successful trader, so make sure you preserve your capital, as this will keep you in the playing field for longer. If you run out of money and can’t trade, you’ll never win big.
Learn to interpret forex news
Markets move because of what happens in the news, so learning to interpret what’s taking place – especially where economic data is concerned – will help you see what you need to do and when. Naturally, it’s not quite as simple as that and you may find it harder to interpret trading news than you at first thought, which can lead to losses if you’re not careful.
Watch out for reported consensus figures, as well as whisper numbers (unpublished and unofficial forecasts) and any changes to previously published reports. And remember – not all reports are created equal. Some will have a bigger impact on others… so there are a lot of factors at play and it can be quite confusing for novice traders.
Don’t get cocky!
It’s important to be confident, yes, but overconfidence can be a real killer. Overconfident traders often find themselves opening too many positions and taking positions that are too big – which ultimately will lead to their downfall.
Emotions can be tricky to manage when you’re trading but you need to be able to control them, or you could find yourself in dire financial straits if you’re not careful. So, even if you have seen a series of big wins recently, keep a level head on your shoulders and don’t get carried away. The game will change soon enough.
Do your research
You can’t expect to just jump into the wonderful world of forex trading and understand what’s happening right off the bat.
You’ll need to read up on and research all sorts of different theoretical notions and strategies first, as well as familiarising yourself with all the different terms and lingo that get thrown around. You’ll feel like a fish out of water at first, most likely, but sooner or later you’ll be one of the sharks – as long as you put the hard graft in at the beginning.
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When it comes to playing the financial markets, forex trading will always be a very popular option because it’s easy to get started and there are very low margin requirements.