How to manage losses in Forex trading

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No one likes losing money and Forex traders are no different from anyone else. It’s a terribly dispiriting thing to see a losing trade get progressively worse and draining even more of your funds. You didn’t start trading to make yourself poorer.

If you let this situation continue unchecked, you can find yourself in very bad trouble fast. If your position suffers from an overleveraged position, this can lead to an outsized loss. If this goes on for a protracted period of time, your whole future as a trader can be in jeopardy.

Yet anyone who is not a wild dreamer will know, one man’s gain is another man’s loss. Nobody has a 100% consistent record of “picking winners” be it on the racetrack or in Forex trading. What you need to do is bow to the inevitable and learn how to cope with your losses when they come.

It would be the height of folly to allow one incident which you didn’t “play right” to completely blight your career as a trader. Three suggestions to avoid this are: firstly to decide on your risk at the beginning of the trade; arranging a stop so that if you are away for any reason, you are protected against loss or at least excessive loss; and realising that all losses are losses, even if they don’t show up at the time.

As in so many situations in Forex trading, it’s all a matter of planning. If you have a well worked out strategy for your life as a Forex trader, your plan will include techniques for dealing with losses. You should do your utmost not to get into these positions and to prevent trading situations which can become unmanageable. If you don’t go close to the edge of the towpath, you are unlikely to fall into the river! The biggest mistake that traders make is that they take very large losses and correspondingly very small gains. This rule applies to experienced traders, not just to those who are “wet behind the ears”. The problem can be easily put down to massive over-confidence in a scenario like this:

Experienced trader believes that he is on to a winner. He takes a large position on what he dreams of as the chance of a lifetime. Forgetting that no one has a window into the future, he goes for it big and everything goes wrong. In a few minutes a time of hope becomes a time of despair and worry. The moral here is to set the maximum loss before you start the trade because that way you won’t be in the middle of hectic transactions trying to decide whether enough is enough.

Many experienced traders advise that the total risk should be kept to less than 5% of an accounts’ equity. That would mean that if we take as an example a trader who has equity of $10,000 in their account – he would attempt to keep losses below $500. In short manage your expectations and stay calm.

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