The Secret to Forex Trading: Limit the Downside

The Forex market can be a formidable opponent. The daily transaction volume is approximately $5 trillion, and the Forex market is regarded as the most liquid market in the world. In most respects, undercapitalized retail traders appear to be outmatched as they take on global central banks, investment banks, hedge funds, market makers and everyone in between.


The odds against becoming a profitable Forex trader are high, but many small investors still try to tame this beast. The experience can be Sisyphusean, as individual mental mistakes, greed, and market-conditional outliers send investors back to square one with emotional and financial scars as a parting gift.

Investors and traders love it, hate it, don’t understand it, or fall somewhere in between. How many times have we heard the saying "Cut your losses quickly and let your profits run?" It may be the most abused cliché in the trading world, but it still rings true. Trading requires a considerable amount of perseverance and grit to overcome the statistically guaranteed adversity. This is especially true in the Forex markets, which handsomely rewards winners while ruthlessly exposes a trader's flaws and weaknesses.

Forex for Beginners
So is trading in forex markets really as simple as as cutting your losses off quickly and letting your profits run? Ask any profitable trader and the answer may surprise you. (See also: Can Forex Trading Make You Rich?)

One portion of the proverb may hold true - cut your losses off quickly. But letting your profits run may be easier said than done, as it relies on the trader’s ability to make profitable moves in the first place. In my opinion, the right side of the chart may be the hardest section to predict with any precision. The fundamental and technical pundits battle for supremacy on what school of thought will win the trade, while actual traders are in the trenches grasping at profits or getting slaughtered as the next wave unfolds. Traders who are positioned correctly have the ability to manage profits, while traders who are fighting the flow are either pressing their eject buttons or experiencing margin calls. Letting your profits run requires a disciplined indifference to P/L fluctuation, and that is certainly an adjustment for the traders who are identifying opportunities to manage winning trades.

The Forex market is a rather technically pure market with global transactions occurring around the clock. The market’s structure generates an intricate puzzle of support, resistance, trends, ranges, channels, patterns, highs and lows, and they are all interconnected and explanatory in real-time, and certainly in hindsight. If a trader ever asks why in the Forex market, there is most likely a headline, news announcement, or technical reason for the movement - making it great for after-the-fact explanations. But live trading perplexes and fakes out traders with nasty unanticipated volatility. This simply means that managing risk and trade size is important to reduce the noise and capitalize on the actual movement or direction the market has to offer. (See also: The Pros & Cons Of A Forex Trading Career.)

Limit the Downside
A solid education can provide an application-based foundation. Aupport and encouragement are also necessary to stay positive as a trader. I am a big believer in having a support network to tap into when you find yourself struggling. Rather than throwing everything out and starting over, traders can keep the core principles (market structure, support, resistance, trends) and surgically remove the flaws that are costly to the P/L curve. Lean on a support network of traders who are performing well and adopt some survival skills during the tough times.

It is very important to identify what is and has been repeatable in the market. There are a variety of ways to apply winning strategies and consistent trades to the market’s predictability and structure. Most successful traders are far more conscious of the downside than the upside. The upside where unexpected profits are acquired is often little more than the market being overly generous. The market is full of surprises, but unfortunately most of those surprises are to the detriment of the trader. Consider the upside as generosity, and keep the downside in the forefront in your strategies.

The Bottom Line
The most important part is to remember to cut your losses quickly. Losing is the worst part of trading, but when the losses are manageable, small and seemingly insignificant relative to your total equity, you’ll be fine. If you find a way to let your profits run, congratulations on doing something that most traders don’t. But most importantly, find a way to cut your losses quickly and you have a chance to survive the chaos the market throws your way. Then, aim to take advantage when it’s behaving to your liking.

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Posted By harryshavers : 01 October, 2020
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I must admit, it has been a while since I penned down an article, and what better topic to pick up than to demystify some of the biggest misconceptions about the Forex/Financial markets. It is okay for one to be inquisitive and doubtful, especially being quite a unique class of financial investment for many, but how you act upon getting the information and clarification is of utmost essence. Stick with me in this one, let’s indulge. In this article, as is always my thing, we are going to have a chat, one of those sessions where all you get to do is sip your coffee as I do the talking.      Is forex trading legitimate? We are talking about the most liquid financial market in the world where more than 5.3 trillion dollars is exchanged every day. In economics, we call it an ‘over the counter’ business. This means than no one institution, no one retail company/Individual, no one country can control the forex markets. It is this high liquidity and stability that causes volatility, i.e. prices of different currencies and commodities moving up and down frequently and continuously. Oh, that last sentence is broken down for you like I am explaining to a five year old to ensure that all you do in this coffee chat is nod, and not ask questions. So that is how enormous the forex market is. It’s a conglomeration of buyers and sellers, everyone putting in their share (capital) on the table, and then trading taking place 24 hours, five straight days in a week, i.e. Sunday midnight to Friday midnight. These are details you can verify in our era of unlimited access to information.   Having said that, everything boils down to how you approach the forex markets, how knowledgeable you are about trading, your ability to analyze the markets for the best trading opportunities, i.e. the best buying and selling positions. I took you through how to approach forex as a business in our previous coffee hangouts.   Moving on, did you know that your local bank performs forex trading every day? That your bank has forex traders on desks who trade forex (buy and sell currencies) on behalf of the bank? You may have walked into your bank to buy or exchange currencies, even better, you probably had to negotiate to get a good rate, especially if it was a considerable amount. This is the most realistic and open act of forex trading I can put across today. Your local bank has a team of dedicated forex traders who watch market prices daily, both local and international currencies, in order to trade and make money for the bank by taking advantage of the exchange rate variations. Every small tick in the price, up or down is an opportunity for them to buy or sell and bank some profits out of the margins. And good for them, we have entrusted our savings with them thereby guaranteeing them of liquidity. That part there my friend, is forex trading for you in its purest form.   That being said, the next big question for you would be; can I trade forex for a living? Allow me to tell you a little about myself. I started Forex trading 11 years ago. I have been trading fulltime up to date. I wake up to it every day, and I live off trading. The forex trading online course that we offer at Fourthstreet Consultants that comes with one on one training sessions is only an extension of our skills attained over many years, sharing our wisdom and mentorship to those willing to take up one of the most rewarding careers, when undertaken with utmost knowledge and skill. However, that is my story in a nutshell, and it’s not our hangout agenda for the day. If you wish, we can plan for another coffee hangout to talk about my journey, my career, the highs and the lows, then you get to know more about myself.   You can trade forex either part time or full time. This is largely dependent on a number of factors, some personal and others capital related. For instance, if you have a fulltime job, it would be best for you to trade part-time. All you would need to do is employ trading techniques which require you to analyze the forex markets and place your trades every close of day. These lessons and skills are all covered in expansive video lessons and well laid out trading strategies available on our online forex course, together with personalized training sessions that we offer at our offices. The beauty of forex trading platforms is that they provide the parameters for you to scale and control your risk and reward, as such, you get to limit how much you can lose or gain anytime you are placing a trade, whether you are present online or not. We teach about end of day market analysis trade executions in our comprehensive forex course. This is where you get to analyze the various currency and commodity markets to place trades based on rewarding opportunities at night towards the close of the day’s trading session. In a previous hangout, I talked about how correlated trading and hunting is, you can catch up on all that here. This article goes ahead to expound that in forex trading, the best trades are the ones that are carefully selected (hunted), and that less is more in trading. This means that you only need a few quality trade set-ups in a month to make your margin as opposed to executing too many trades. Too many trades means more exposure of your capital, and therefore more risk to your portfolio.    That being said, one can as well take up forex trading full time. And what’s better yet, even for those who do trading as their main job doesn’t need to be stuck on their computer screens the whole day. You only need to screen and analyze the different forex charts for trading opportunities periodically, for example every four hours, or six hours, or for some traders like me, every 12 hours. This gives you the freedom and the space to take care of some other business and/or family while at the same time allowing your trades the space and time that they need to work out as per your edge. However, for it to be fully rewarding and supportive for your daily needs, you would need to invest a significant amount of capital for the reckonings to work out. Just like any other business, investing a bigger capital yields more considerable returns that would sustain you for a fulltime business. Don’t fall in the fantasy and misconceptions that are out there that you can make high returns in forex trading from a small amount of capital. IT NEVER WORKS.    And this is where we call it a day for our coffee hangout. Thank you for being a decent audience, even when your right of speech was breached

Although often overlooked by some traders, forex trading risk management is extremely important if you want to be a successful trader.  Why?  Well, as you may know, as the forex market is quite volatile – and there is a substantial amount of leverage available, there is a chance that you can lose all – and more – of your invested money if you do not properly employ risk management.     One of the best ways to combat the problem is to plan for each trade in the proper manner. One way to properly plan your trades is to minimize your trade losses.  In other words then, you should know when to control your losses before you engage in a specific trade or trades.  For instance, you can set a hard stop – or set your loss stop at a specific point before engaging in a trade.  Conversely, you can also set up a mental stop – which is less concrete than a hard stop, but it nonetheless is another way to minimise forex trading losses.  The most important aspect of implementing a stop loss though is to stick with this stop loss.  Emotions will often come into play when the actual trades are in progress and there is a chance that you may let the stop loss move further in the hopes of seeing a currency recovery.  However, this practice will most likely result in you losing more money.   You should also ensure that your lot sizes are a reasonable size. Lot sizes refer to the forex transaction sizes; a standard forex transaction size is 10 000 units, but mini-lots may be 1000 currency units.  While some forex brokers may encourage you to get larger lots, in order to minimize risk, it is a good idea to keep your lot size on the smaller side.  If you keep your lot sizes smaller initially, you will more likely use less emotion when you make trades – and thus, you will learn to depend on sensible logic and decision making.   Along similar lines, while you should keep your lots sizes small, you should also not open too many of these lots.  Additionally, it is vital to understand currency pair correlations.  As an example, if you were to go long on EUR/CHF and short on USD/EUR, these pairings equal to two long lots of EUR.  This situation is not an ideal one because if the EUR decreases in value, you will feel this effect twice as bad.  Thus, it is important that you are both knowledgeable and keep track of your exposure.   Overall then, due to the higher risks involved with forex trading, risk management is more important when it comes to trading currencies.  As you may realize, traders need to act – and quickly – when there is an opportunity in the forex trading marketplace.  If you have proper risk management strategies already in place, you will be in a better position to act upon these opportunities.  After all, if you want to be a successful forex trader that is involved in currency trading for the long haul, you must be disciplined and adhere to certain risk management procedures.  If not, you do stand a chance of losing everything within an extremely short period of time – even minutes.

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