How to avoid large forex trading losses
While trading can be profitable in the short term, most traders find it hard to remain profitable in the long term. Often, this is because they incur sudden large losses, surrendering all their existing profits on a single trade. Just a single bad trade can quickly lose all the profits built up over weeks or months.
Suffering a heavy loss not only damages your account balance but also takes a heavy psychological toll. It can destroy your confidence and willingness to trade, and it can take time to recover from the psychological damage. So what are the best ways to avoid major losses?
Good trading practices
1. Don't focus on earning lots of money. Avoid the get-rich-quick mentality of trying to make more money fast. Good trading is not about chasing profits. What's important is how to minimise your losses. Of course, you cannot reduce losses to zero, but keeping them as small as you can, will turn you into a good trader.
2. Avoid being overconfident when you're winning. If the market suddenly moves against you, you may think you can afford to wait for it to return profitable again, so you will not cut your losses when you should. And then the more the unrealised losses increase, the more you will want to avoid surrendering your profits, and the more you will risk losing all of them by not cutting your position.
3. Take a break after a bad trade brought on by false confidence. Do not become overconfident; all traders face losses at some point. Always maintain a calm state of mind and have the mental strength to avoid overconfidence. After a loss, it's tempting to immediately reopen a position in the hope of quickly recovering the lost capital. However, it's often better to stay calm and step away from the charts and trading screen for a while. Good trading opportunities will come again, and there's no need to jump back in straight away.
4. When you've made a large profit, don't brag about it, no matter how happy you are. This is to avoid becoming overconfident. If you show your friends the results of your great trade, they may indeed look at you with renewed respect. However, truly profitable traders and professional dealers never brag. They understand what it's like to make money trading, understand the essence of trading and do not feel the need to tell everyone how good they are.
5. To control your mental health, don't tell your friends or others, even when you've suffered a major loss. What people say out loud can feel real. It's not healthy to talk about how much you've lost, for example. If you talk about your losses all the time, you could end up attracting losing traders, and make it difficult for yourself to get out of the negative spiral.
6. Focus on the trade process, not the profit and loss. A profit is not always a good trade and a loss is not always a bad trade. If you have a trading plan before you take a position and follow its rules, it's the right trade, whether you make a profit or a loss. Conversely, if you break the trading rules and make a profit, it's probably only temporary luck, and repeating it will not yield long-term profits. Eventually, it could even lead to a large loss, so it's important to realise that trading against your rules can be very dangerous.
Analysing your trading performance and decision-making is the key to understanding how to avoid large losses. If you have made a large loss, look back at what happened and whether you lost control. There's always a reason for most big losing trades, and understanding the causes can help you avoid making the same mistakes in future.
Always have a trading plan in place to avoid large losses. If you hold a position with a large unrealised loss at midnight, set a rule to complete the trade before you stop trading. Also, if you open a position after making a large profit, set a stop limit order to protect your overall gains.
Understanding the dangers of bad trades with large losses will help you trade more consistently. Always focus on following the trading plan itself, not the outcome, and remember that small losses can be recovered quickly. Be aware that even just a single large loss can damage your confidence and take a long time to recover.