The Small Loss-Big Win Strategy
You might have heard the popular phrase in forex trading, “Cut your losses short, but let your profits run on.” This means that traders need to strategise carefully in order to get out of losing positions quickly while still maximising their winning potential. While you may endure small losses along the way, gaining is still entirely possible.
The Importance of Staying Focused
Losing is part of any trader’s career, but it’s important to remain focussed throughout your trading career in order to take profits. One loss does not necessarily mean your account will be wiped and you’ll be left with nothing. In fact, the right techniques will help you manage your losses while protecting your overall profits, but this takes time, determination and plenty of dedication to the trading sector. Traders should also be aware of not jumping out of specific trading situations too early through the fear of loss, even though our brains can automatically signal us to avoid all risk. Practice is the key, so let’s find out more.
How to Cut Losses Short?
Many forex traders end up depleting their account because they do not understand the importance of risk management. They lack the discipline to take what would have been a very small loss, early in their strategy and end up in a dire situation. As discussed, losses are imminent in any financial market, and traders need to adhere to effective money management strategies to keep them at a minimum.
1. Be Prepared, Do Your Homework
Markets are affected by geo-political developments. Exchange rates, for one, fluctuate in tandem with news releases, economic reports, wars, elections and various other factors. Traders should always be prepared for these issues and learn everything about how the markets work. This is an on-going effort and one that will help you adapt your strategies according to different market situations. It includes having the mental flexibility to be able to react in time, if the markets go against you. Trading plans should be made after careful evaluation of short-term and long-term financial goals.
2. Develop Strategies and Stick to Them
Nearly all traders are provided with simulated accounts or demo accounts, where they can practice their strategies, without the fear of losing money. This helps in establishing confidence and perfecting trading strategies. Traders can also understand their trading systems with such accounts, so that they don’t get stuck in the live markets. There have been instances where traders have accidently pushed the wrong buttons, leading to huge losses.
Practicing strategies on demo accounts is also very helpful. It helps hone strategies and fine-tune them as you gain experience.
3. Use Stop Losses and Take Profit
This is the part about accepting losses and still moving on. To protect trading accounts from being wiped out, “stop-losses” and “take-profit” features are available in all major trading systems, including MT4 and MT5. A maximum daily loss amount has to be decided, beyond which all positions would automatically close through these features. It is one of the most effective ways to keep losses at reasonable levels.
4. Avoid Over-Leveraging
Traders of margined products face this dilemma. Everyone wants to earn money, despite knowing that leverage could wipe up the trading capital. Leverage is the most attractive feature of the currency markets, but you should know that your risks are magnified too. A smaller position will limit the losses.
5. Newcomers Should Start Small
No demo account can perfectly replicate the live markets. So, start trading small amounts and slowly increase as you gain experience. It takes a while to get accustomed to the trading terminal and things like slippage become clear while trading live. It is also a good way to understand emotions while trading.
6. Maintain Trading Journals
Keeping records of all trade executions helps to improve trades over the long-term. Traders could also record their emotions, specific to certain situations, in order to identify emotional biases.
How to Let Profits Run On
As much as it is important to avoid losses, profits have to be protected through good money management techniques too. For this, “trailing stops” can be used. You can choose from both buy and sell trailing stop orders. A sell trailing stop order helps in setting the stop levels at a fixed price below the applicable market price, along with a trailing amount. If the market price increases, stop levels rise by that trail amount, but if it decreases, the stop loss levels don’t change, resulting in a market order when the pre-decided price is achieved. The buy trailing stop works in the opposite direction.
A winning streak can sometimes make traders overconfident. This could result in over-trading. There is a thin line between what constitutes over trading and what we mean by not quitting trades early. This is why market trends have to be studied carefully. For this, technical indicators are helpful. Major forex platforms offer a plethora of indicators, both free and premium. They can aid in generating signals to buy and sell, based on pre-set parameters.
But remember; do not overcrowd your charts with too many indicators. Two volatility indicators or two oscillators will give you contradicting signals. Also, take care to carefully choose the colours or fonts of lines and bars on your screen.
One of the most important aspects of trading is to keep a steady temperament while trading. Emotions, such as anger, revenge, greed, frustration and fear, only contribute towards magnifying losses. It takes discipline and patience to continue trading and resisting the urge to just take the profits available at hand. The ability to manage emotions comes with experience.
The overall market sentiment gives key signals most of the times. Traders need to get rid of the idea that they are smarter than a majority of market participants. Only informed decisions, made through careful analysis will stand the test of time.
If you liked this educational article please consult our Risk Disclosure Notice before starting to trade. Trading leveraged products involves a high level of risk. You may lose more than invested capital.