If you’ve traded any security, you’ve heard the old axiom about keeping your losers to a minimum and letting your winners run. The latter part of that expression is self explanatory. Most forex traders know that they don’t want to cut their winning trades. Simply keep moving your stops up as the trade continues to move in your favor and you’ll be on course for locking some nice profits. Cutting losing trades before they turn into disasters is what many traders struggle with when they enter the world of online forex trading. Bailing on any trade, winner or loser, is an emotional thing for traders, especially rookies, but it should be mechanical, not emotional.
Keeping your losses to a minimum is perhaps the most important thing you’ll do on your road to learning forex trading. We’ve all heard the statistic that 90% of all traders fail and that number is so high because many traders don’t know how to keep their losses to a minimum. Minimizing losers is integral the development of any forex trading strategy. And when we say keep your losses small, we’re not necessarily talking about the amount of losing trades you have. We’re talking about the dollar amount of those losers. After all, it’s possible to take 10 forex trades and have seven losers and still end up profitable. Yet, the only way to do this is keep the losses small in dollar terms.
So how does someone that has just taken on learning forex trading go about keeping his losses small? The first thing to do is understand the risk-reward profile of each trade. Let’s say you’re trading a heavily traded pair like the EUR/USD during an especially volatile time, maybe after unemployment data has come out. Here your risk-reward profile maybe a little different than during a calmer market period. If you see that risking $1 to only make $1, that’s not a trade worth taking. Optimal risk-reward would be risking $1 to make at least $2, if not $3.
That’s just one part of the equation, though. Many seasoned forex traders will also set strict risk parameters for each trade they take. For example, a veteran trader that has $10,000 in his forex brokerage account might limit his risk to three percent on every trade. Meaning that if his trade goes against him by $300, he’s out, no questions asked. Think about that for a minute. If you’re trading a standard forex lot where each pip is worth $10 and you’re willing to lose $300 on the trade, that’s 30 pips so you’re giving the trade plenty of room to breath while still being fairly conservative.
There’s no hard and fast rule for how much a forex trader should be willing to lose on a particular trade. If you’ve got $100,000 in your brokerage account, you can be a lot more liberal than you can with $10,000. The point is keeping your losses small is what’s going to keep you in the game.
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