One of the most important rules in Forex trading, is that you have to keep minimizing losses as much as possible. With smaller, even if more regular losses, you will be able to hold out longer and weather periods when the market is moving against you, giving you edge when the trend reverses. There are many techniques out there that teach about minimizing losses, but the only one that is although simple, really and practically proven, is setting up a maximum loss that you are willing to take, before entering a new trade.
The maximum loss represents the largest sum of money, the loss of which you regard as acceptable in just one trade. If you limit losses to a certain percentage of your overall capital on a per trade basis, a streak of losing trades will never stop you or hinder from recovering. Neglecting to be disciplined with their money management and minimizing losses is the downfall of almost 90% of the trader community! Make sure to stay organized, and follow these simple directions, and your trading will be much more safe.
Set up a percentage of your capital acceptable as losses. In this case most traders use a 5% level, where if your trade moves against you for a sum larger than 5% of your overall capital, the trade is immediately liquidated. For example, if you have a deposit of $1000, you open a trade, and after applying spreads and a certain period of markets moving against this trade, you are looking at a losing p/l of $50 or more – you close this trade.
The main advantage of this method is that you set a very solid psychological barrier, at an understandable loss amount where you would immediately close the trade.
Set a Stop Loss on your trade. This is a slightly more complicated way of minimizing losses, because in this case the trade is closed when it reaches a certain market level, rather than an understandable sum of money. Thus, when setting your stop loss it is important to calculate the size of your trade correctly, and having a good understanding of what impact money-wise market movements will have on your trade.
Some lifehacks for making this easier, is learning to detect and use support and resistance, as well as general visual analysis of the chart and price history.
While this method is more flexible, it is also a bit more complicated. However, if you were able to master stop losses, there’s something that is even more flexible, and you will like it:
This type of stop loss gives you the ability to move the stop loss dynamically, as your trade unfolds and moves to a different price level. In other words, the stop loss will “trail your trade at a preset distance from its current price. You can achieve pretty much a guarantee of at least break even in most cases, by using this tool. The only drawback of trailing stops is that they have a minimum distance of 15 pips with most brokers, and therefore not suitable for scalping and trading on very short timeframes.
It is very important that you admit to yourself, that minimizing losses would be impossible without a systematic approach and psychological readiness. Work on developing your money management skills and loss limitation, or you will never find success in trading!