Any trader who reads any decent Forex education knows that, one of the keys to making money when trading currencies is to cut losses but despite knowing they should cut losses – most traders don't. So why do traders have so much trouble cutting losses? Lets take a look in more detail, at this key trading error and how to avoid it.
Let's look at the various reasons traders let losses run and while some may seem totally illogical remember that when a trader enters a trading signal logic goes out the window and emotions take over.
Not Placing a Stop Loss When Entering the Trade
This is probably one of the most common errors new traders make – they enter their trading signal in the market and then decide to place their stop loss later or decide to have a mental stop in their head but this is a fatal mistake. As soon as the stop loss level is hit by the price, the trader doesn’t want to take a loss so decides to give the trader a little bit longer and see if it turns around but the loss in most instances doesn't turn around. This trader could have had a small loss, now he has a big one and his emotions are telling him to give the trade even more time and the trade ends in disaster.
Solution: Never run mental stops or place them, after your trading signal is entered in the market they should both be done BOTH at the same time, to avoid the scenario we have just discussed.
It Won't Matter to Override the Rules Just Once
Many traders think a trading scenario looks really good so they don't want to miss the big move so decide to trade with no stop at all or again a mental stop loss and while they say they will do it “only once” this trader is trading on emotion and once becomes twice, three times and so it continues until he losses his money. This trader has no trading strategy which is rule based on exit – its based on his emotions. He has no money management rules and therefore doesn't have a trading system which has any chance of making money and he soon losses his trading account to the market.
Solution: A trading system MUST have rules to enter but stop losses to exit and money management are the foundation of any trading system. There are many different methods of trading currencies which can make money but any experienced trader will tell you – NO currency trading strategy or system will make money long term unless, it protects core equity with strict money management rules. A trading system which pays no attention to money management is like a football team, which thinks its offence can win without a defence! Football teams win by protecting their goal and in Forex trading, the goal is your trading account equity. If you don't protect it, the market will soon score a knock out punch!
The News and Others Telling them the Price is Wrong
When a trader is in a trade, he will often look at the news and see everyone telling him, his trade should not be going the way it is and it will turn around. Across the media, he will see that the presnt price is wrong and will soon change in his favour. This causes, the trader to wait for his trade to turn around and of course it doesn't. If a trade is going against you, don't listen to new which reflects logic or opinion, look at the price action! Opinions are just that a view but the only price which is the right price is the market price.
Solution: Never listen to other peoples views. They will simply tempt you to hold losses. Look at the chart and if a price is rising or at a new high,don't argue with the market - get out and cut your loss.
The Loss is to Big to Take so Best to Wait for it to Turn Around
This might sound stupid (and it is) but there are a huge number of traders, who let their loss get so big, they think the only way of recovering is to hang on to the trade. it's given them such a big loss and there account is so far down, they see no other way out than to “hope” the trade comes back but normally it doesn't and they end up having to take the loss because there out of money.
“ I cant get out I am losing to much” Might sound a ridiculous statement but I did it once – I used a mental stop loss, let the trade run a bit past my stop loss which was placed to take a $10,000 loss. I ended up, taking a $285,000 dollar loss and at $185,000 loss, I had decided to wait for the turn but it never came!
Solution: Never think any loss can't get any worse - it can and will, when you are in a trade hoping for it to turn around.
Best Way to Avoid Running Losses – Simple Tips
Read some biographies of the world's great Forex traders and you will see, they all place risk control at the top of their list in terms of making a Forex trading strategy successful. There is no way, you will become a successful Forex trader if you let your losses run out of control. Never run mental stops – stop loss orders should be entered at the same time as you place your open order in the market. Write your rules down and follow them and NEVER override them. If you do, you have no trading system and with no system, you are trading in a way which will see your emotions take over your trading and as soon as this happens, you will lose.
When you take a small loss, you can move on to the next trade set up – your mind is clear and your equity will not have taken a critical hit but run a loss and let it get bigger and you will not only feel it emotionally you will feel it financially. Cutting your losses in Forex trading is sound advice and it sounds easy to do - but it only is if you are aware, of why people run losses and put a plan in place to avoid you making the same mistake.
I hope the above reflections, on why traders run losses is useful and helps you, avoid the mistakes most traders make, in terms of not controlling losses and helps you become a disciplined trader – It's stressed by almost every great trader but its true, emotional traders lose - disciplined traders win so trade with discipline, keep your losses small and you will be doing what the majority of traders don't and will enjoy currency trading success.