One fear that all beginners have while planning to pursue forex trading is encountering losses. Those who have done some basic research about the forex market will be aware of the volatility and risk that you need to handle as a trader. However, those who have a solid trading plan won’t have a hard time if they prioritise risk management while making trading decisions. It would be impossible to make a profit from all the trades that you enter as winning and losing are part of the trading process. But you can surely keep the losses within the limit by sticking to your plan and taking calculated risks.
In this blog, I will be sharing 4 proven tips to prevent losses and succeed in forex trading. So, keep reading to discover the success secrets of top forex traders.
- Develop a Fact-Based Trading Plan
You will always read and hear about the relevance of trading with a plan. But just having a vague plan will not lead you anywhere in the world of trading. Your plan should be well-defined and logical. Hence, you need to develop a fact-based trading plan with clarity and precision, leaving no room for confusion. In order to devise a logical trading plan, you should start by setting realistic and reasonable trading goals that are actually achievable. Because your trading plan is a set of guidelines and rules that are the means for attaining your trading goals.
It would be tough to trade with only one big goal in mind and it is important to break it down into smaller goals. These small goals can be your profit target for a trade. Since the price fluctuations in the forex market are measured in the number of pips by which the currency pair price moves, you can use a pip calculator to get the monetary value of pips that you have caught. Then, you can decide the number of pips you should catch in a trade to reach your target profit in the end.
Pip calculations are important to decide the key metrics for implementing your plan. When you have a detailed action plan, it will be easier to make informed decisions and carry out the trading process in the best possible manner. All your trading decisions should be driven by logic as many traders make the mistake of trusting their gut feelings instead of facts. You cannot become a successful trader by relying on your emotions. You need to think rationally and stick to your plan in any situation.
2. Only Risk What You Can Afford To Lose
The only way to prevent a loss from happening is to take precautions and when it comes to trading, this precaution is referred to as risk management. You cannot make money without risking money in the trading process and you don’t have any control over the result being a win or loss. The outcome of a trade depends on the market being favourable or not. However, you can control the loss by limiting your risk per trade. This is done by deciding your trade size and leverage.
You should only risk what you can afford to lose and here the money you use for a trade should be calculated after considering your risk tolerance. But generally, risking anything more than 2% of your total account balance is not recommended. Because the more you risk in a single trade, the more you will lose in the trading process. If you are not in a position to risk thousands of dollars for a trade, you can keep it small and trade on a micro account with smaller lot sizes.
It is not mandatory to start trading with a big account and you should not be using excess leverage for amplifying your profits. The losses will also be just as huge when your analysis goes wrong. You should also rely on tools like trading calculators for quick and accurate results, allowing you to make timely decisions for managing the risk. This way, you will not be taking unwanted risks under the influence of emotions.
3. Put A Stop Loss In Place
There are a lot of traders who hold onto their losing trades as they are not ready to accept the loss. They keep waiting for a reversal to close the trade at break even and it never happens. But if you place a stop loss order, you won’t be dealing with such a difficult situation as the losing trades will be automatically closed at the specified price point. This allows you to cut the losses early and limit your account drawdown. Just make sure that the stop loss is placed properly based on your risk tolerance.
Sometimes, traders want to keep the stop loss very tight and they keep it right next to the opening price. This is a major mistake which can lead to unwanted exits from trades when there are sideways movements. Hence, you should place the SL at a price that confirms a loss but not too close to the opening price. If you place a wide SL that can also lead to bigger losses.
After placing the stop loss, you won’t have to monitor the trade unless you want to adjust the stop loss later on. It will be better to not change the stop loss in the middle of a trade as you might end up making poor decisions when you are under stress.
4. Take Breaks When Needed
Taking a break is very important to keep doing your best. Because breaks give us time to rest and rewind and traders need this time to reflect on their decisions and correct any mistakes that they spot. If you see that you are encountering several losses in a row, there is no point in opening more trades until you detect the issue that caused all these losses. This can either be a flaw in your strategy or a sudden change in the market situation which affects the performance of your strategy.
You should stop trading when the market is unfavourable and come back when you find ideal opportunities. Sometimes, the winning trades turn into losing trades as you fail to close them at a profit and lose all your gains by keeping it open for a longer duration. You will often let your winners run for maximising the profit but you should be able to exit it at the right time.
Such trading pitfalls are common and you will be able to avoid them by reviewing your trades regularly. Hence, you need to record all your trades in a journal and take some time off to evaluate your performance.
Wrapping Up
So, these are 4 proven tips that you can follow for preventing losses and achieving success in forex trading. A loss cannot be prevented all the time but you can surely improve your chances of success by applying logic and making rational trading decisions. These tips have helped a lot of traders to move forward in their trading journey and realise their goals. So, you can also make it happen by staying focused.