The classic mindset that new forex traders get into markets for, is to make money. If we’re all honest, that’s why everyone is here and there isn’t a problem with that mindset per se. The problem occurs when making profits are the first thing that a new trader thinks about. Instead, you the first thing that you should be thinking about is how to limit forex trading losses.
Getting your mindset right in this manner, is the most important thing a new forex trader must do to be consistently profitable. Limiting your forex trading losses should always come before setting profit targets.
While you’re never going to avoid forex trading losses, you can greatly limit them by considering the following points.
Setting Stop Losses Appropriately
The first way to limit forex trading losses is the obvious namesake: Setting a stop loss order accordingly.
If you’re forex trading without a stop loss then you’re just asking for trouble. Before you have even entered your trade, it is advisable to have a plan in place for your stop loss and a hard stop loss level applied to your order in MT4.
While more advanced forex traders might simply use a mental stop, having the discipline, speed and patience to be able to close your order where your forex trading plan says you should takes a high level of skill.
Battling your human emotions to lock in a loss is one of the hardest things to overcome as a forex trader and if you can’t do it, then plan your trade with a stop loss level and let your MT4 platform stop you out as planned.
Money Management in Your Forex Trading
Another aspect of how to limit forex trading losses is to make sure that you’re on top of your money management at all times.
Money management is a broad topic that encompasses many aspects of keeping your trading capital safe but the first thing that you must do when setting money management parameters in your trading plan, is to define your risk. Ask yourself the following two questions:
What percentage of your overall capital are you going to risk in order to target how much?
What is your win rate expectancy?
By answering these two questions, you can calculate your money management strategy within your overall forex trading plan and take a huge stride toward limiting your forex trading losses.
Managing your Forex Trade
The final point to consider when trying to limit forex trading losses, is how you go about managing your trade.
Do you simply place your trade, set your stop loss/take profit levels and then walk away from your screen? Or do you instead stay glued to a 1 minute chart and ride every bullish or bearish single pip tick that the market prints?
There isn’t a right or wrong way to go about managing your forex trade and whether sitting at a screen helps or hinders your decision making process depends solely on your individual personality.
The important thing in deciding how you manage your forex trading positions are whether you are able to follow your original trading plan and whether you have the discipline to stick to it if things aren’t going your way.
Remember that you had a plan for the sole reason of limiting your forex trading losses, so follow it!
As we said above, just remember that you’re never going to completely avoid forex trading losses, but you can limit them. Plan your trade, follow your rules, trade with an ECN forex broker and you’ll be on the path towards consistently profitable forex trading in no time.
Source: Vantage FX Blog