Unlike any other business where inventory, overheads and asset management takes place, in Forex Trading money alone is involved. Hence, the forex losses incurred hither and thither are also felt in absolute monetary value too. In the usual course of business, many factors are static and the profit doesn’t depend on any trends. While in some cases, certain factors affect the margin but the investment is mostly risk-free. On the contrary, there are no assurances for profit or risk-free capital in the forex trading as trends are prone to change and profitable trades are elusive. Even the investment is susceptible to forex trading. By identifying the types of forex losses usually occurring and our tips to avoid forex losses, losses in Forex trade could be indeed reduced to a great extent.
Scalping is the method of initializing a trade, in the hope of booking a profit even with the slightest increase in prices. Though it is widely believed as a safe way of trading, considerable risk is involved because of leverage. Disaster is waiting to happen with any step in the wrong direction and profits earned in many trades is bound to lose in a few trades. Scalping is not a professional way of trading and keeping it away is always good. But if you are a die-hard scalper, then better follow proper risk management in lot sizing and fixed capital allocation for each trades. Also, maintain a suitable risk-reward ratio of at least 1:2 or 1:3 since the number of scalping trades will be high and the number of losses will also be high, but a good risk-reward ratio can certainly keep the trading account in gross profit.
Incurring loss is part and parcel of Forex trading and the attitude to accept it differentiates the expert from the amateur. The right time of entry and exit, making profits by following the tips makes you an expert with time. If anybody promises you heaven by getting profit in every trade, Beware! and don’t fall in line.
Trading is not a high way and you couldn’t afford a fully accelerated driving. You need brakes and controls for a smooth ride and for the safe arrival at your destination. A good trade starts with proper stop loss and limit order. Predefined checkpoints are compulsory which keep you on track.
Most of the indicators in the market are unreliable since they repaint and a proper entry can’t even be identified with them. Such indicators will only add to the chaos in a trader’s mind and only jeopardizes a trader’s capital. But it is a necessity that you have to trust an indicator and stick on to it for a long time. (A trustable long-term companion needs to be the best- The Pipbreaker which doesn’t repaint.)
Even if you have an impeccable indicator and follow all the trading rules to perfection, without proper money management, you would reach nowhere. Predetermine the money you are ready to risk for every trade so that any failure won’t affect you emotionally. Emotional stability is essential to avoid forex losses which occur sequentially after a loss.
Types of Forex losses
We’ve collated three types of losses which usually occur in the forex market. We’ve also suggested 3 tips to avoid forex losses.
Profit trade turned into a loss
This is the most heart-wrenching loss for any trader. A trade will be in decent profits, but the trader’s expected target has not yet been reached. Eventually, the market makes a dive and hits the stop loss. That’s the nature of the market. We can’t complain. We just have to adopt an approach to prevent the imminent.
Tip #1- to avoid forex losses
There is a saying in the trading community, “Cut short your losses, Let your profits run”. So it is not wise to close your trades with minimal profits. Hence, stops can be modified to cost price once the trade makes a decent move in your favor. It is the perfect perquisite for any trader as it can avert the loss and let the profits run too.
Neutral trade turned into a loss
When the market stays at any price point for a longer period, it can mean a lot of things. It can indicate trend reversal, consolidation, low volatility or the market is awaiting a cue for the next move. A trader can easily confer that the market can move in either direction depending on the new cue received.
Tip #2- to avoid forex losses
This is a get out of the jail free card for the trader. It is better to get out of the trade at cost price and re-enter the trade once the market gets out of its own jail.
Loss turned into a bigger loss
This is a classic amateur’s mistake. The textbook catastrophe that can happen if the stop loss is not predefined. A trade moves against your prediction and you expect it turn into your favor. As the market moves further, the loss widens and you will not be able to take a huge loss and desperation creeps in. This type of loss can wipe out the confidence of the trader let alone the trading account.
Tip #3- to avoid forex losses
Make due preparation and follow risk management for every trade. Place stop-loss for every trade irrespective of the conviction on the setup. In case the trader forgot to place the stop loss, always remember the saying, “Cut short your losses”, close the losing trade at the outset.
“Go with the trend” is the usual advice received by every trader, but you never know when the trend changes its direction. So take a deep breath, plunge in, but before you do that, check your oxygen supply. Had you been in the field of trading for some time, you would have understood by now, profiting is not at all tedious. But in order to trade, you need to have a solid capital. So always cut your losses short and preserve your capital. Capital is the priority!