Forex Training When to Cut Losses

Forex Training When to Cut Losses

One aspect of forex training should be learning how to cut your losses.  Every trader will suffer losses at some point and it is important to know when to cut the losses before they become too great.  Your forex training should cover how to detect a bad trade and what to do after a bad trade has been completed.

Forex Training to Detect a Bad Trade

There are certain indicators to a bad trade that you should learn to identify.  There are many indicators but 4 of them are the most common and all new traders should know about these:

  • The trade is placed too close to the potential reversal point.  These trades include long positions placed at the resistance level or short positions placed too close to the support level.  When this is done the risks are higher, the profit margins lower and the potential for losses increases.
  • The appearance of a reversal candlestick is another bad trade indicator.  This indictor includes short trade bullish reversals and long trade bearish reversals.
  • News releases that cause the market to trade in the opposite direction of the open position.  Having an open position when news is released can bring about major losses as the market swings according to the news.
  • Having a losing trade with the currency behaving similarly in other pairs.  If you are trading the EURO/USD pair and are losing you should look at other EURO pairs to see whether the currency is in decline.  If all the pairs are losing then this is a bad trade.

Cutting the Losses

Once you have determined whether a trade is bad or not you have to cut your losses.  It is recommended that once you have identified the bad trade you manually close the position and stop trading for the day.  You should not give the trade time to recover because there is a higher likelihood that it will not.  You should also not continue trading to regain the losses.  Attempting to do this is emotional trading or revenge trading and this has no place in a successful trading system.

What to do after a Bad Trade

After you have closed the losing trade you should complete two steps.

  • The first step is to analyse what went wrong with the trade.  You should first check that you followed your trading plan.  If you did you must look for the turning point in the trade.  When you find the turning point you can check to see if there were any indicators that you missed.  Knowing what these indicators are will stop the loss from happening again in the future.
  • The second step is to adjust your trading plan accordingly.  If you have noticed a flaw in your plan during step 1 you should fix the plan to eradicate this flaw.  You should also include the indicators you identify into your plan so you know what to look for in future trades.

It is also best that you take some time from the forex market after a losing trade.  These trades can affect the trader’s psychology and mental state.  Taking time away from the market allows you to calm down and think rationally.

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