Run Profits and Cut Losses
When it comes to actually generating a return from any kind of leveraged trading, the primary factor you need to bear in mind is that it’s all just a glorified numbers game. One position loses, another gains. Markets move up and then they move down. Currencies get stronger and then they get weaker. No matter what you do, you will often be on the wrong side of these fluctuations, and sometimes you might even get the call right. Where the profit potential comes in is in the balancing act between ensuring that you earn more on your profitable positions than you lose on those that don’t work out quite so well. It’s all about the aggregate, and so it pays to build steps into your trading that give you the best chance of achieving this successful outcome.
Firstly, you need to accept that from time to time things will go pear shaped. Even the most accomplished forex trader will lose on positions on a frequent basis, and depending on the strategy its possible to still make money with numerically more losses than wins. The nub of the issue is in ensuring that your losses are handled as far as possible in a manageable way, and that their impact on your capital and your overall trading account is as minimal as possible.
No matter whether you’re trading forex, auctioning second hand cars or doing any other type of selling – you need to maximise your profits and minimise your losses. That sounds like a no-brainer, and you might be scratching your head at this point, convinced that that’s the only way you would ever do business.
In actual fact, the vast majority of traders don’t apply this basic, fundamental premise to their trading, and as a result they lose out on easy money that they could otherwise have used to help prop up their earnings. Translated into the forex trading sphere, this means that you need to allow profitable positions to run on for as close to the full half-cycle as you can, while cutting out any positions that look like they might not be meeting your price projections.
Consider the example of a position that is sitting with a £100 profit. At this point, the natural assumption from the novice trader is to close out, take the money and run on to something else. On the contrary, if that same position ended up reflecting a £100 loss despite your best forecasts, you might be more inclined to give it time to recover and get back into positive territory. This has the effect of throttling your gains and plumping up your losses. A losing position is no good to you – if you can sell for -£100 now, it’s simply not worth waiting an hour and selling at -£120. Your best course of action is to cut your losses and take your capital elsewhere, into an investment opportunity that is more likely to yield a return.
Likewise, when a position is doing well and the markets are moving in your favour, you really want to wait it out as long as possible – until you start seeing signs of a reversal. Until you know an upwards trend is in danger of reversing, there’s only disadvantages to cutting out. Keep your capital exposed – if it’s continuing to earn money, there’s no reason to stop it in its tracks. Cutting out early just means you’re going to have to invest more time and effort, not to mention absorbing the additional degrees of risk, in order to achieve the same results.
When it comes to trading forex successfully, letting profits run and cutting losses quickly needs to be something of a mantra. Live by it and stick to it throughout your day-to-day trading. By having the nerve to make the right call, against your instincts and natural judgement, you can have a dramatic impact on your bottom line and ultimately on your future as a forex trader.