Forex trading is as much about dealing with losses is it is about dealing with losses correctly. You will have periods of drawdown and they will last for trade after trade so how do you deal with them and how do you work to get your equity back to new highs? Lets look at this aspect of money management in more detail.
Firstly – If your a Beginner
If you have bought a Forex robot or expert advisor which gives you a chart of performance which simply increases month after month with only minor drawdown and the odd loss here and there you need to get real. These systems DON'T work and prey on greed and traders, who have no idea of the concept of draw down or losses and there impact on trading accounts. If you have one of these trading programs or are thinking of using one – don’t because you will soon become just another losing trader.
The Real World of Forex Trading
Even the best traders will take weeks on end of losses and these periods need to be dealt with and not only, do you need to keep the losses under control and keep your account equity intact as best as you can – you also need to have a trading plan, to help you recover them and put your account back in profit which we will look at next.
To mentally prepare yourself for losses – run your system backwards and see what the biggest fall is from peak equity and how long it takes to recover. This will give you an idea of what you face but there is an old saying “your worst drawdown is ahead of you”. That said, knowing how your losing trading signals can impact your equity and a rough time to recover, will help you trade with discipline and not forget your money management rules, in the period of losing trades.
Trade Less
If you are experiencing losses and getting frustrated with your trading strategy - have a break from trading and put your account in cash. If you are feeling nervous, frustrated or angry then a break will clear your head. If you still want to continue executing trading signals, cut back your trading size and frequency and only go for trades which you fee,l have the best odds of success which leads me onto the next point, variation of bet size and its importance.
The Importance of Variation of Bet Size
In any game of odds (which trading currencies is) it's proven that the variation of bet size can not only increase the profit potential of your trading system, it can also minimize the draw down on your overall account equity.
Many traders get frustrated, angry and want revenge on the markets when they lose and either don't reduce their trading size or even worse - increase it. This is stupid, the market is not out to get you and its not personal, in terms of currency markets taking your cash. So don't let your emotions control your trading, stay calm and focused and when in a losing period as stated earlier, cut back size, exposure on your account and only focus on the best trades.
Don't rush and try and get a bottom in place, on your equity losses and keep trading size small, until you have covered them. Sure it might take you a bit longer but the further you fall behind, the harder it is to recover - so don't be in a hurry. Losing periods on your trading strategy will be followed by winning periods (if you have a trading edge) but don't gear up after the first winning trade, wait until recovery. Once you are back at break even, you can start to increase bet size again.
You often seeing winning football teams go 8 games losing and when in a streak such as this the team can easily lose a 9th. This in many ways is due to confidence but eventually, the team wins and more wins follow and its the same in Forex trading – you have winning and losing streaks. Get more defensive when losing streaks occur and attack, when your winning.
To Enjoy Trading Success – Learn to be a Good Loser
No one likes losing money but it's part of trading Forex markets, so get used to it. As stated earlier, you need to have confidence in your trading, an idea of likely drawdown, keep your emotions out of your trading and cut your trading size and frequency, until your account starts to get back on track. Forex trading is about confidence in what your doing, the discipline to follow your plan and to go into defensive mode, when you are losing. If you do this, you may lose money in the short term but long term, you will enjoy currency trading success.