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Forex Trading: Important Rules 3

 

It is within our abilities to let big winners become huge. This is what will determine how we will achieve overall during the year. The key here is to let a winning streak run and have trailing stops that will usually be outside the daily noise of the market, so that they are not so tight as to get stopped out during the regular trading process.

This means that you need to be ready to give up a fairly large portion of a winning trade’s open profit. This is also the thing that makes this so hard to carry out. Actually, we should be adding to a winner and widening stops rather than trying to establish how tight our stops can be to detain the largest amount of profit.

The trade has shown you before if it plans on you being a winner, and the chances are it is a low-risk idea if you were to add to the position now rather than ‘strangle it’ with stops which are too tight.

It is also crucial that your management rules leave some space for large winning trades, and that the rules are defined in advance and understood before you place the trade in the first place. This will enable you to yield to your rules when you do get the big winner.

Cutting your forex losses short
 

This rule is in fact the sister to the one mentioned above, and is usually just as difficult to accomplish (even though it is very easy to define). Just as profitability comes from a few large winning trades, capital preservation will come from avoiding the few large losers that the market will see fit to send you each year.

Try to set a maximum loss point before you enter the trade so that you may know ahead of time approximately how much you will be risking on this position.

If you happen to have an exit price that indicates that your trade is a losing one you should exit it before it gets any bigger. Due to gaps at the open, or limit moves in futures, it is difficult to be 100% sure that we can get out with our maximum loss. However, simply having good knowledge of the rules, and always sticking to them will save you from bad trades that just keep on going against your position until you have lost more than many winning trades can ever make back.

If you have a losing position that is at your maximum loss point, it is best for you to just get out straight away. You can’t just wait and hope that it will turn around to your advantage, this goes against common sense.Being that a trade can either be a winner or a loser, and this one is shouting ‘Loser’ at you, the chances for it to turn around and become a large winner is really very small.

It is also not reasonable to risk any more money on a trade that has already shown itself to be a loser. In these circumstances, you should simply close it out (accepting the loss) and just move on. Despite what you may think, this will leave you in a much better place financially and mentally, than if you hold on to your position hoping it will get back as you wanted it initially.

Even if it does get back to where you wanted it, the mental energy and negative feelings involved are really just not worth it. This is one of the reasons why you should always keep to your rules and exit a position if it hits your stop point.

Click for the next step in your Forex Trading Guide - all about losing trades

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