The hardest part about being a Forex trader (in the tumultuous Foreign Exchange Market) concerns having to cope with financial losses during trading. Suffering loss is not only about the pain and distress that a trader feels, but can also act as a catalyst that might push them into making decisions that are not sound, leading to greater losses and producing a vicious spiral that leads to a trader’s account spinning out of control. A standard response to counter such an eventuality has been the development of coping strategies to deal with losses and at the same time being able to execute that coping strategy. Losses can be devastating for a trader and in some instances may even cause them to abandon their trading strategies or the trade altogether. Below are ways in which operators can better deal with losses when trading.
Knowing How Much Loss You Are Willing To Tolerate
Once a Forex trader accepts that they will have losing trades and in some occasions go through losing streaks (popularly known as “draw-downs”), they will then have to decide how much they can psychologically tolerate without losing their nerve. For instance, a trader might think that they could cope with something like a 50% draw-down in their trading account, but in reality, they could find themselves unable to deal with a draw-down of about 25%, if it happens. Additionally, any draw-down in a trader’s account always grows bigger. The amount that one needs to win back to get to the number that they started with always seems to increase. What this means is that if a one were to get a deep drawn-down of about 50%, they would have to win 100% to get back to the original 100%. The fact of the matter is that the deeper your losses, the harder it becomes to get back to your original starting point.
Accepting the Fact That Losses Are Inevitable
Traders have to come to terms with the fact that making losses is inevitable when trading in the Foreign Exchange Market and accept this as the nature of the way in which the market moves. One traditional strategy most traders use to avoid losses includes “Turning with the wind.” When executing this strategy, marketers need to open a trade in the opposite direction. Forex experts describe this tactic as not “avoiding” a loss but in effect crystallizing a loss made by changing the trader’s net position. If the trader is long one lot and goes ahead to short two lots, they will soon realize that they end up net short one lot together with a crystallizing loss on that one large lot. Desperate times often demand desperate measures, and this is why traders often decide not to close losing trades and then let them run further and further against them and eventually blow their account. Traders only need to accept the reality of making losses in the Foreign Exchange Market and respond by developing a viable strategy that can avert a financial loss.
Using A Forex Trading Strategy That You Believe In
After deciding what amount of loss they can tolerate, it is paramount for the traders to be sure of the technique they are using to decide precisely when to enter and exit trades (including what currency pairs to invest in) will always produce a positive “expectancy.” In simpler terms, this is to say that over large samples of transactions, the chosen strategy always makes more money than it loses. It is rather important that you believe in your trading plan. The best way to build this belief is by back-testing it over several years of historical trading data. During losing streaks, it is only those traders with a strong faith in their strategies that usually have the courage to keep going. If they happen to stop trading, or lose their nerves and overtrade, they will most definitely miss out on the winning streak that frequently follows the losing streak. Traders also need to remember to use a fractional equity as a risk money management system. Such a system gives an operator peace of mind knowing that there exists a buffer that is meant to reduce the total losses during losing streaks.
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