Cut Losses And Keep Winners
How to cut the losses and keep the winners?
Forex trading, and trading of any kind really, needs you to look at risk robustly. In Forex trading your money is not only at risk when you are trading. But also when you don’t trade at all. Let me explain.
When I started out on this Forex journey I attended a seminar where the speaker told a story about a couple he introduced to Forex. This couple Deposited X amount of money into a trading account and left it there. Completely forgot about it.
Over the course of a year the currency they deposited the money (USD) stayed the same but when they converted it back to their local currency the amount of money they had increased over that year. That’s what I mean by your money always being at risk.
This perspective will answer why seasoned traders trade $1 million differently to trading $10,000. Warren Buffet himself said it would be easier for him to average a 50% return with $1 million compared to $1 Billion. Trading $10,000 your absolute down-side is $10,000 and that is a lot of money but the upside is uncapped.
Looking at that you could definitely throttle the risk on an account of $10,000. $1 billion is a different story. Along with your down-side being $1 billion. There are not many investments you could put that much money into without making a splash.
Cut the loss
In Forex Trading, in Business, it’s important to know when to cut your losses. Know that the market will take care of your upside. If you can control your losses, you’re better off than the guy/girl that gives profits back with big losses.
How to cut your losses:
1. Have a plan.
2. Don’t ever move your stop! (Unless you’re trailing it or moving it to Break-even.)
3. Don’t risk too much.
Most people don’t have a plan when trading the Forex market. A Trading plan will let you know what your exit is. Your Exit is non-negotiable and is determined BEFORE you ever enter the trade.
Moving your stop might work once or twice and it will be the worst thing that will ever happen because that ONE time price will continue to go against you and eat your profits and then some. Don’t ever move your stop to make it bigger. Take it on the chin and move on.
Risking too much of your account could ensure you blow up before your edge has an opportunity to play (Check out Risk vs. Reward)
Keep the winner
Believe it or not, this is probably the hardest part of being a profitable trader. When you’re winning it’s easy to feel like the job is done but that’s exactly when you need to focus.
How to keep your winners:
1. Have a plan
2. Don’t cap your upside
3. Take off risk, don’t put on Risk.
YES! Winning needs a plan too. You need to have thought out what winning might look like before taking the trade. Winning with no plan could lead to giving profits back. You always need to know the exit.
I am the minister of an uncapped upside (trailing the stop loss instead). I swear to you winning is much easier when you allow the market to move because it WILL surprise you. If you’re right, there’s no telling the extent to which you are right.
The 3rd point is a little complex because I believe traders can add risk to a winning trade but it’s important to understand that adding less risk each time you add risk is way more beneficial than adding the same amount of risk on the same trade. The more that price moves in your favor the chances of price moving against you are proportionately rising. Ruminate on that. So play your cards right.
Don’t bet the farm.
Don’t lose your shirt.
Cut the L.
Keep the W.