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Success In Forex Trading Can Be All About Knowing When To Quit
If you are at all interested in the forex market and forex trading, then you have likely heard how people have struck it rich, and how others lost their shirt in a hurry.
The people trying to sell you forex relate products like trading robots, stock signal indicators, training courses, and training accounts don’t focus too much (if at all) on the horror stories as that would be bad for business.
But regardless of who you want to listen to, there are lots of people who have lost lots of money trading forex and one of the main reasons for high levels of loss is that traders, especially inexperienced ones, don’t know when to call it quits on a losing position.
There’s no better way to emphasize this that through an example.
Let’s say that you have $100K USD of capital to invest in the forex market and your ready to put it all into one position. You’ve scoped out the Canadian dollar and figure it can’t stay at 1.2000 to USD, so you buy Canadian Dollars and now have holdings of Cdn$ 120,000.
However, the next day your enthusiasm is damped when the exchange rate moves against you to 1.2500 and you’re instantly in a significant loss position.
At this point, you could cut your losses and call it a day, but instead you decide to stay with the position. The next day brings with it a further decline down to $1.265 Cdn$ to USD. At this point, you still think your initial assessment was correct and that it can’t get any worse, so you hold firm on your position.
This is a hard but not uncommon situation to get into. What if the position gets even worse? What if it slides to some sort of seasonal low that you couldn’t predict no matter how much you analyzed the market indicators? At what point do you say you’v e had enough and how much of your original capital are you prepared to lose?
At this point, the problem is not knowing when you should quit. A sound investment strategy would have been to establish a stop order right at the beginning so the minute the market moved against you, you’d sell off and minimize your loses. Yes, you’re still incurring a lose, but the loss amount has been determined by you up front and is acceptable in your risk management.
However, even with a well laid out exit plan, you may still hold on to the position and still incur larger losses.
The key is know when to quit and have the discipline to a) have a loss management system, and b) to follow it.
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