When to Cut Your Losses
When trading the FX markets, it is essential that you know when to cut your losses. By being able to know when it is time to get out of a trade, you can keep the losses small, which will, in turn, allow you to continue the trading when the market behaves as you predict.
To take losses when they are small, the leverage that you apply to trade will not come back and can keep the account well funded. When you do not learn when to cut your losses and cover your losses, it can lead to overwhelming losses that you will not be able to recover from. In fact, it is one of the most common destroyers of forex trading accounts. But the biggest issue is to realize when it is time to let go.
Click on Below Video: How to Place a Stop Loss the Right Way
There are several different ways that you can use to determine that, but they all have one similar component acknowledging a particular point on the chart that represents when your analysis is not correct.
For some people, this is a percentage of the total account.
Example: You might decide any time that you down 3% you are going to get out of a market, no matter what is going on. It is common and allows you to have a particularly defined amount of loss you are willing to take.
Another common way is to simply place a stop loss at a point that you feel represents that things are changing in the marketplace.
Example: Many traders place their stop loss below the most recent swing low or the most recent significant swing high. By doing this, you are forcing the market to change the recent trends to take you out. It shows you that the market isn’t going where you thought it was, and you need take few step back and rethinks about the position. By doing, you can take yourself out of the emotion and begin to see the opportunities that may or may not be there.
Some traders will simply base their exits on time.
For Example, Day traders will not carry a balance over to next day and will exit the forex market no matter what at the end of their trading day. It allows them to leverage their trades highly and sleep at night without worry about the spikes in the middle of the night going against them.
No matter what you decide base on your stop loss placement on the common theme all of these viable ways is that you have to be committed to adhering to rules. Most traders blow up their accounts all have the same problem they broke some of their golden rules and stop losses are without a doubt one of them. One of the most important points to learn is that the markets are always there, and the next trade is simply around the corner. You can go ahead and admit that you were incorrect in your analysis, and close the trade. Doing that will save your money in the long run.