When looking at a forex chart different people have different views. Some might think it looks so easy, if I’d only bought there and sold there. Hindsight is such a great thing. Others may think how on earth do I make money in that mess of movement? We all see things differently and that is what creates a market.
On the face of it forex prices move to one destination and often back again. Sometimes in an orderly fashion, sometimes slowly, sometimes retracing, sometimes powerfully explosive either way. Making money trading foreign exchange is all about taking advantage of this. To make money we need movement. Sometimes movement can be good, in our favour, and bad, against us. Whatever it is, we need it.
This is when a trading system comes into play. We need a method for taking advantage of the market movements; a structured approach for getting in and getting out. This system needs to be designed in a way where the total sum of winners is greater than the total sum of losers over the same period for it to be profitable.
This comes back to the age old truth, cut losses short and let profits run.
Cutting losses short is about using stop losses
At times using a stop loss can make you feel that you were a sitting duck when the market just touches it taking you out and then moving in your desired direction. By using a stop you’re opening the opportunity that you’ll be stopped out at the worst possible price. This can and will happen just by the practice of putting a fixed stop in the market. This is one of the psychological challenges traders must face and overcome.
Some traders use the blame game, blaming the broker for stopping them out, thinking that the broker must have targeted them somehow. From experience, a lot of times there is little variation between brokers’ prices, except when there’s a highly volatile announcement when the price may vary depending on the brokers liquidity sources.
Using stops sets up the probability that you will exit at what seems like an unlucky price. Without a stop you remove the likelihood of this occurring.
These aren’t reasons to not use stops, but psychological challenges and perceptions that need to be changed.
A compelling reason for a stop is to take a balanced approached by thinking about the total of all the losses you saved by getting out early and not letting that stop run. Yes, there will be some winners that turn into losses. Sure enough, the open positions can move a very long way against you before coming to a halt. The odd “unlucky” exit is a small price to pay for these substantial combined loss savings.
- Do you always use stop losses placed in the market?
- Do you ever think the broker’s looking for your stops?
- Do you set stops in a place to try and avoid them getting hit rather than focusing on the profitability of the strategy?
- Do you worry about a losing trade going in your direction?
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About the Author: I’m Rachel Hunter, TraderRach, a Forex Trader who helps traders achieve the life they love with forex. Be strategic and design your trading business for sustainable success and have fun! That’s my mission. Join many traders’ gaining the edge with “10 Powerful Lessons for Forex Trading Success” plus other goodies. Years of precious learning specially packaged up for you. My background before trading is as a Chartered Accountant and Chief Financial Officer. I know what it takes to make a trading business rock on. It would give me great pleasure to make a difference to your success.