The Secret to Forex Trading: Limit the Downside
The Foreign exchange market can be a formidable opponent. The daily Forex Trading transaction volume is approximately $7 trillion, and it is regarded as the most liquid market on the planet. In most respects, undercapitalized retail investors appear to be outmatched as they take on global central banks, hedge funds, investment banks, market makers and everyone in between.
The odds against becoming a profitable Forex investor are high, but many small-scale traders still try to tame this beast. The experience can be Sisyphusean, as individual greed, mental mistakes, and market-conditional outliers send traders back to square one with emotional and financial scars as a parting gift.
Traders and investors hate it, love it, don’t understand it, or fall somewhere in between. How many times have we heard the popular saying “Cut your losses quickly and let your profits run?” It may be the most abused cliché in the financial world, but it still rings very true. Trading and investment require a significant amount of grit and perseverance to overcome the statistically guaranteed adversity. This is especially true in the Forex trading, which handsomely rewards winners while ruthlessly exposes a trader’s weaknesses and flaws.
Forex Trading for Beginners
So is investing in currency markets really as simple as cutting your losses quickly and letting your profits run? Ask any successful trader or investor and the answer may surprise you.
One part of the proverb may hold true – cut your losses quickly. But letting your profits run may be easier said than done, as it relies more on the investor’s ability to make profitable moves in the first place.
The right side of the chart may be the hardest section to predict with any kind of precision. The technical and fundamental analyst battle for supremacy on what school of thought will win the trade, while actual traders or investors are in the trenches grasping at profits or getting slaughtered as the next wave unravels. Investors who are positioned correctly have the ability to manage profits, while traders who are fighting the flow are either experiencing marginal calls or pressing their eject buttons. Letting your profits run mostly requires a disciplined indifference to Profit/Loss fluctuation, and that is certainly an adjustment for the investors who are identifying opportunities to manage winning trades.
The currency market is a rather technically pure market with global transactions occurring around the clock. The market’s structure generates an intricate puzzle of resistance, support, trends, ranges, patterns, channels, highs, and lows, and they are all interconnected and explanatory in real-time, and certainly in hindsight.
If an investor ever asks why in the Forex market, there is most likely a news announcement, headline, or technical reason for the movement – making it great for after-the-fact explanations, but live trading surprises and fakes out investors with nasty unanticipated volatility. This simply connotes that managing trade size and risk is important to reduce the noise and capitalize on the actual movement or direction the market has to offer.
Limit the Downside
A solid financial education can provide a solid application-based foundation. Support and encouragement are also necessary to stay positive as an investor. It is recommended you have a support network to tap into when you find yourself struggling. Rather than throwing everything out and starting over, investors can keep the core principles (market structure, resistance, support trends) and surgically remove the flaws that are costly to the Profit/Loss curve. Lean on a support network of investors who are performing well and adopt some survival skills during the tough times.
It is very vital to identify what is and has been repeatable in the forex market. There are a variety of ways to apply winning strategies and consistent trades to the market’s structure and predictability. Most successful investors are far more conscious of the downside than the upside. The upside where unexpected profits are taken is often little more than the market being overly generous. The currency market is full of surprises, but unfortunately, most of those surprises are to the detriment of the investor. Consider the upside as generosity, and keep the downside at the forefront in your strategies.
The Bottom Line
The most vital part is to remember to cut your losses quickly. Losing is the worst part of investing, but when the losses are manageable, small and seemingly insignificant relative to your total equity, you will be fine. If you find a means to let your profits run, congratulations on doing something that most investors don’t. But most crucially, find a way to cut your losses quickly and you have a chance to survive the chaos the currency market throws your way. Then, aim to take adequate advantage when it’s behaving to your liking.