How to stop Forex losses from now on? Have you realized how much easier it is to get huge losses than small profits in your Forex trading? Understanding how money management works, and implementing it is one of the fastest ways to grow your account. What makes most traders unsuccessful is they don’t know the basics of an effective money management strategy. Those who quickly learn this simple concept easily succeed, while the rest remain stuck for too long and end up quitting. It’s time to learn how to stop Forex losses and secure your account now.
Earlier we have looked at how to avoid losing money when trading Forex, but we wanted to go deeper into this topic.
Apply a good money management strategy and money management plan
Coming up with a Forex money management strategy is not that difficult. It is easier to come up with one rather than watch your account meltdown and eventually lose your entire capital. I always insist, even a good trader with the best trading strategy will likely fail if he doesn’t apply money management strategy. It is not enough to have a money management strategy, you should have an effective money management plan. In this article, I will be showing you a 3-step approach to controlling your risk.
Come up with your risk tolerance
Answering this question genuinely and soberly will be your first step towards happy trading. However, this will vary from one trader to the other. A highly skilled trader, who has the discipline to execute his trading plan, will have a higher risk tolerance as compared to a beginner. Risking too much is the number one reason many people fail at trading. Many traders find it easy to calculate their expected profits but not the associated risk.
When calculating the risk, don’t do it just as a percentage. You need to come up with a dollar value. For example, if you have a $100,000 account and you plan to only risk 5%, the percentage value looks very much acceptable. But if you calculate the dollar value at risk (5%*$100000=$5000) you’ve got to think again and maybe adjust the risk downwards. We are wired that way, our true attachment is to the money and not the percentage of risk.
On the other hand, you will note that as your account grows, you will have to adjust your risk accordingly. Assume you start off with $5000, after a few months your account has grown to $10,000. Assuming that initial risk had been set at 5%, that means $250 was at risk. If you use the same risk level with the account at $10,000 that dollar amount may be too high and you may consider revising it downwards.
The point I am bringing out is that risk should be per trade. Keep adjusting the risk to levels that you are very comfortable with. Apart from the % value, try to get the dollar value you are putting at risk. Only risk an amount you are ready to lose.
Have a trading plan and stick to your plan
To solve this puzzle of consistent profitability in forex, a trading plan is one of the important pieces. Many traders will keep procrastinating and at the end of it end up with no plan. Coming up with a trading plan should come first, don’t trade without a plan. A trading plan should be written down clearly showing when to enter and probably when to exit.
A trading plan should give you circumstances in the market, or signals that will trigger an entry order and at the same time when and how you exit the market. A written plan helps you to remain accountable. Remember, you are the boss and you are accountable to yourself. A trading plan keeps you checked, prevents emotions from getting in your way of trading. A trading plan will help you make objective trading decisions at any given time.
Even if trades go against your plan, avoid modifying your plans. When your hard earned money is on the line, we often get very emotional and are tempted to modify the plan. Remain disciplined and follow your plan faithfully. Unless market conditions have permanently changed, follow your plan to the letter.
The important components of a good trading plan
When coming up with a trading plan, there 4 components of a good trading plan:
1. It must have an entry strategy, make sure your strategy can distinguish high probability trades from low probability trades
2. It has a risk-reward ratio incorporated
3. An exit strategy should be known before even entering into a deal
4. Have a plan for after trade exit. This applies whether it’s a gain or a loss. This period is when you are most vulnerable and you have a high appetite for revenge. On the other hand, you may have won, and you just want to stay in the market to win more. A good trade plan should tell you what to do after wins or even losses.
Determine your pain Threshold
With a risk tolerance and a trading plan in place, we are almost there on our way to stop Forex losses. The next item is about us. In trading, if you don’t check yourself well, you could be your own worst enemy. You need to know yourself, know your breaking point. A pain threshold in forex is that point where an extended break from the market would be advised after a series of lost deals.
If for example, you have a string of losses back to back, it can be very demoralizing. For instance, you have a series of losses and you end up losing 10% of your capital. This may affect anyone, getting into another trade immediately would lead to further losses. At this point, an extended break from the market would be advised.
Will this really be enough to stop Forex losses?
You have to establish at what point you will need to take a break. For example, when trading, if I lose 10% in a string of trades, I always take off for some weeks from the charts. It helps me reflect on other things, refresh and then come back. Note that, the smaller your risk per trade is, the longer it will take you to reach your pain threshold. If you have ever experienced this, there is a chance that you probably doubted your skills or even yourself. A two week break enables you to focus and get your energy back. A break is actually the best way to stop Forex losses and get time to plan what’s next.