The Forex market is highly attractive but traders struggle to make consistent profits; that is why good risk management is essential. To help you protect your investment here are 17 ways to minimize losses in Forex trading.
The Forex market gives the most opportunities for profit of any market. It’s a decentralized market that gives trading access 24 hours a day, 5 days a week.
There are a huge number of currency pairs to trade all over the world as well. And most importantly it’s a very volatile market that gives more, not fewer opportunities to make and win trades.
But this volatility also causes a lot of risks as well.
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The stress and risk that comes with the Forex market’s volatility can cause a lot of strain and uncertainty, especially if one isn’t very experienced in Forex trading or day trading as yet.
Facing stress in Forex trading is just part of the deal. It won’t ever go away.
You can, however, learn to cope with the pressure and stress of Forex trading and come up with great ways to manage it and minimize the effects that it can cause in your trading.
Every successful trader has had to do the same.
In fact, every musician, athlete, actor, or any person that has to perform under a great deal of pressure can choose one of two things:
- Let the stress, fear, and pressure be a negative influence and let it attack their rationality, motivation, concentration, and emotional state, otherwise known as the ability to perform.
- Or they use it to their advantage and let it fuel awareness, energy levels, and abilities by harnessing and controlling their state of mind and emotions.
Why am I talking so much about emotions in an article about minimizing losses in Forex trading? Everything that we will discuss links back to being in control of your mind and emotions in some way or the other and these points are all ways in which to do just that.
- Trade Less
Most traders overtrade. They think that by trading more they will have more chances of making a profit. This is a fallacy, however, since it is good trades that make a profit not the number of trades.
This is something that experienced Forex traders understand and manage well and which is why they tend to have consistent profits.
Make sure that when you open a trade the juice is worth the squeeze. In other words, you have a good indication that you can make a decent profit and aren’t Forex trading just to trade and be busy.
If you can reduce your losing trades as much as possible, the profitable winning trades you close will have a much greater impact on your bottom line.
Increasing your profits is ALL about reducing, preventing, and minimizing your losses, and trading less is one of the best ways to do this.
- Choose the Time of Day That You Trade
Most traders tend to ignore the impact of the time of day that they trade.
Forex traders who are active during periods of less volatility tend to be more profitable than traders who trade during periods of high volatility, which will be harder to predict and much more illogically erratic.
The high volatility periods for the different currency pairs vary but can generally be summarised as the first few hours of each trading market, whether it is the Asian session, the London/European sessions, or the New York/American session.
This one goes hand in hand with trading less. If you stick to the daily time frame, you will be forced to trade less frequently as there are fewer quality opportunities in a shorter trading “day”.
Trading in a time frame is good because it forces you to slow down, allowing you to think through your decisions fully and not act rashly.
Good trading requires a lot of thought and strategy from beginning to end, as you follow a well-thought-out Forex trading strategy.
- Always Consider Outside Forces
Always know and consider factors that will cause traders in the Forex market to react. This is regardless of your own personal beliefs.
Even if you are a technical trader that does not trade on what is happening in the market on a political, psychological, or emotional level, the perceptions that traders bring to their day trading do affect the market.
So, even if you do not trade based on the NFP or news trading that may move the market, make sure you are completely aware of these things.
Just because you don’t trade on the news, there are many that do, and this will cause greater volatility in the market and movement one way or the other.
Just be aware of what news is happening and its potential impact on the market. This awareness will ensure that you are in a much better position to reduce your trading losses.
- Master One Trading Strategy at a Time
There are many great Forex strategies. It’s easy to get overwhelmed by all the options and feel pulled to and fro by other traders saying that you should use the strategy that they use if you want to be profitable.
It’s actually a good idea to use multiple Forex trading strategies depending on what is happening in the market and the patterns you see happening.
The more strategies that you know very well and can utilize the better.
This will just give you more opportunities to make good trades. It’s the “know very well” part that is most important in this case though.
If you want to know how to be a successful trader, you have to accept that it takes time to gain the knowledge and experience you need, and this is true for trading strategies as well.
Choose one strategy that really seems to fit you and study it every day until you’ve mastered it.
Only when you know it like the back of your hand should you even think about starting to get to know the next Forex trading strategy.
Then you should do the same with the next and the next until you’ve built up a good toolbox of strategies to implement depending on the market circumstance.
- Keep It Simple
Try as much as possible to simplify the entire Forex trading process.
Don’t overcomplicate everything or see indicators everywhere you look. Too many traders overcomplicate things.
Keep to the basics, I’m not saying don’t look at indicators or don’t use charts. Just don’t get so caught up in the data that you cannot see what’s happening in front of you in the market.
- Have a plan
Every article on being a good and successful Forex trader will address this point. Have a trading plan.
Having a Forex trading plan eliminates many factors of stress and gives you a step-by-step structure on what to do in a Forex trade.
The less space you give for emotion to creep in and take over, the better. Having a trading plan also increases your chances of success.
Your plan should be based around this strategy, your goals, available capital, trading style, time frame, and the risk you are willing and able to take.
- Exercise – physically and mentally
This may not seem relevant to Forex trading, but as we have kind of shown, everything affects your trading life.
If you are in great health and in a good state of fitness, it will not only help with keeping stress under control but it better fuels the brain and the ability to think and react quickly on your feet.
So, make a habit of doing things to exercise and increase blood flow to the body, and the mind.
- Take breaks
This is just common sense. The brain cannot keep operating optimally without breaks.
Without breaks, you will start to lose optimal awareness, and this will cause mistakes.
Just a few minutes off the screen can allow you to refocus your mind as well as decrease stress levels.
It may be a good idea to take breaks at regular intervals by setting an alarm, so you don’t forget to take breaks.
- Work on your self-confidence
If you do not have self-confidence this will lead to self-doubt, and that will cause you to make Forex trading mistakes and second guess everything that you do and every trade you make.
A mind without confidence is an indecisive mind. To succeed in Forex trading, you need to be confident.
Confidence is not recklessness, mind you, but you need to build up the kind of confidence that only can come by knowing what you are doing through study and experience.
- Use stop losses
The markets can turn on you at any time, and depending on the volatility of the market, this turn can be aggressive and devasting to your account balance if you don’t manage risk.
Make sure to always use a stop loss to minimize the damage that can happen.
A stop loss is a Forex trading technique that limits your losses by taking you out of losing trades at a predetermined level.
This is essentially a safety net that could significantly curb losses in times of Forex trading crisis.
Stop losses should be utilized regardless of your level of trading skill or experience.
You may use a 1:1, 1:2, or 1:3 risk-reward ratio depending on your type of trading and the level of your experience but definitely always use stop losses to mitigate risk.
- Use proper lot sizes
Trading using proper lot sizes is crucial to your success in Forex trading since the lot size determines the value of each point of the currency pair you are trading.
100,000 is the standard lot size for the units of the base currency you are trading. The lot sizes you trade should be proportionate to the amount you are willing to risk on each trade.
- Control Your Losses
You should only ever risk a maximum of 2% of your trading account on each trade. This will ensure that you can survive any losing streak that may happen when Forex trading.
It is often recommended that beginning Forex traders set a 1% risk cap per trade and that they exercise the discipline to stick with this. As you gain experience you can up this to the 2% mentioned.
It’s very important to keep in mind that with Forex trading, losses are not linear.
This means that a 50% loss would require a 100% gain in another trade to get back to your original trading account amount.
- Use leverage carefully
Leverage is a huge advantage when Forex trading and day trading. It is a tool that allows a trader to make exponentially more than they could make if they could only trade with the funds in their trading account.
This tool, however, comes with a great deal of risk.
If for example, you trade at a 1:50 leverage and your trade moves in a favorable direction, your profits would be 50 times as much as if you only traded with your own funds.
This also means, however, that your losses would be 50 times greater if the market moves against you.
- Do extensive research before you start trading
It is very easy to start Forex trading. But just because getting a trading account is easy and the Forex market is so accessible does not mean that trading successfully is easy.
It is crucial to do proper Forex research before putting your hard-earned money at risk.
You need to research in two ways. a) get to know Forex trading and the market as much as possible.
Forex trading, if done right and well, is a lifeline commitment to learning about the markets and all that this entails.
- b) World events can have a significant impact on the Forex market, so it is important that you have your finger on the pulse of what is happening globally and the currency markets in which you trade.
- Take the time to learn from mistakes
Losing money is just part of Forex trading. When you do lose a trade, don’t lose your cool or lose your mind.
This will cause a wide possibility of Forex trading mistakes that could cause you to lose much more than if you just cut your losses quickly and with composure.
Take ownership of the loss and any mistakes you had made and learn from it.
- Only risk what you can afford to lose
A solid and healthy risk management strategy is vital to trading Forex. Do not trade without it.
Be honest with yourself and establish how much you are willing and able to risk. This is related to controlling your losses but has more to do with your mindset.
Don’t use day trading as a way to get out of debt or make up for a lack of funds to pay your bills or take care of your family. Count the money you trade as lost.
This does not mean that you give up and trade recklessly.
This means that you can’t have a “need” to win mindset because this will be detrimental to your Forex trading strategy as you will not be able to keep your emotions out of your trades.
- Stick to a single trading strategy
Once you determine which Forex trading strategy you want to use and really get to know it well, you should stick to it, no matter what.
Do not be a Forex trading strategy bouncer going from a badly implemented plan to another. Give yourself time to get to know your trading strategy very well.
Conclusion
Forex trading comes with a great opportunity for profits, but it also comes with a fair share of risks, especially to traders with the wrong mindset, lack of experience and trading education.
If managed properly, however, even losses that you incur will just make you a more successful and profitable Forex trader in the long run as you keep learning from them.
Learn from these 17 ways to minimize losses in Forex trading and more importantly begin to apply these pieces of advice in your trading life, you will have a great chance of becoming a successful and profitable trader with longevity.
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