Keep Your Losses Small in Forex Trading
Unfortunately, many people think that trading Forex is an easy route to millions of dollars because some $19.95 eBook told them so. Those types of publications talk about the potential winning trades you can make, but few will even mention the potential losses.
As an example of a winning trade, let’s say the EURUSD contract is trading at 1.2500. You believe the Euro is going to increase in value, so you buy a contract for 100 000 Euros and sell $100 000 USD (this will require a deposit of about $1000 of your own money). After a few hours, your prediction is correct, and the value of the contract goes to 1.2510, making 10 pips profit. Because it was a $100 000 contract each pip is worth $10, therefore you made a profit of $100 on your $1000 deposit. A 10% profit is pretty good for a few hours’ work!
However, what do you do if the value of the contract goes to 1.2490? This means that you lose $100 or a 10% loss on your $1000 deposit. Uh oh, how many of these losses can you sustain? On a small account of $1000, not many! Therefore, the key to successful Forex trading is that you need to keep your losses to a minimum, as you WILL make losses eventually.
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The only way to guarantee never to lose money in Forex trading is to never trade at all. The one thing that few dodgy Forex eBook sellers mention in their book is that losses can occur, and they WILL occur to everyone. Here are some ways to minimize your losses in Forex trading.
Have a Trading Plan
Most losing Forex traders do not have a trading plan for what to do if they make a losing trade. They simply hold on to their losing position in hopes that it will come back. Most times, their losses can’t be sustained by their accounts, and therefore they end up losing everything. The smart traders that make millions trading Forex have a trading plan that tells them what to do if they start making a loss.
This usually means getting out of a trade very quickly if it is not performing, thus minimizes their losses. These good traders have no problems whatsoever admitting they made a losing trade. In fact, they will probably tell you they make twice as many losing trades as they do with winning trades. So how do they make money? Simple, one of their winning trades may make ten times the amount of one of their losing trades because they kept their losing trades small. Therefore, put your pride away and learn to accept a losing trade quickly!
Practice makes perfect
Most online Forex brokers will allow you to practice your trading first. Each broker has slightly different procedures for entering and exiting trades based on their software, so it’s best to practice first. This means that they can set up a practice account with $10 000 (or some other amount) of hypothetical money, where you can watch and study their charts and make trades with this “money” as if it was your own.
By far, it is the best way of learning how the markets move and you can test any trading techniques you come up with. By doing this, you will learn so much, as it’s like learning how to trade using someone else’s money and there is no risk of a real loss (or a real profit either)
Have a Large Trading account
Once you have practiced trading Forex and gained confidence in your trading ability by using an online brokerage’s software and hypothetical money, you may feel it is time to use your own money. You should have as large an account as possible. “Large” here doesn’t mean a millions of dollars. If your broker requires a deposit of $1000 for each $100 000 of a currency your trade, why not have $10 000 in your account. That way, if you lose 50 pips (i.e. $500); you have only lost 5% of your total money instead of 50% if you only had $1000 in your account. If you don’t have $10000 to trade, the next tip may help you out.
Choosing a Lower Leverage Level
This will be very helpful for those people who may have only $1000 (or less) to trade. Most Forex brokers will give you a leverage ratio of 100:1 and the standard contract is for $100 000. This means that the lots they trade in are $100 000. Meaning that for every pip (i.e. 0.0001 increase/decrease in the currency pair), you make/lose $10. However, what has become popular today are called “mini contracts”, where the broker trades in lots of $10 000. This means that for every pip, you only make $1.
This is a good place for either inexperienced or under-capitalized traders to start. Therefore, if you only had $1000 in your account and you were trading a mini account and you lost 50 pips, you have only lost $50. Not too bad, but it also means that if you made 50 pips, you only made $50. At the end of the day, your losses are kept to a minimum and you can stay in the game longer.
Believe it or not, there are even some brokers who deal in “micro lots”, which means that each pip is only worth $0.10. Your losses will be kept to an even smaller level while you are learning, so you can approach trading with a clear head and not worrying about losing your shirt!
The key to successful Forex trading isn’t about always making winning trades. If you trade Forex, you WILL make losing trades, and anyone (or Forex eBook you bought online) who tells you differently is lying. The key to successful Forex trading is simply to minimize your losses. By minimizing your losses, you stay in “the game” for longer. If you are still in the game, your next trade may make you ten times (or more) than all of your losing trades combined.
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