By James Woolley – I started trading forex a few years ago now after having previously traded the FTSE 100 index and specific shares. Just as in these other markets there is one big lesson to be learned from trading forex and that is as follows.
If you want to become a successful forex trader you have to learn to cut your losses early and let your winning trades run for as long as possible.
When I first started out I used to make a lot of mistakes, but it was all part of the learning experience and I’ve come out of it a consistently profitable trader.
The biggest mistake I made initially was not having any stop losses at all, so any relatively small losses I incurred used to mount up and become big losses.
It’s very easy to believe that you will ultimately be proved right and stick with a trade, which is what I did quite a lot initially, but this can be very expensive and to be honest I quickly learned that’s it’s best just to accept you were wrong, take a small loss, and move on to the next trade.
On the opposite side, when it comes to winners you should either have a set target price and profit you are looking to achieve and stick to it, or ideally you should let your profits run as long as possible.
Any target profit should be higher than the stop loss you are setting. For example, if your stop loss is 10 points away from the entry price, then your limit price should be more than 10 otherwise you will need a fairly high win ratio of 50% just to break even.
Make sure you stick to this target as it is very easy to see a profit and grab it before the price has reached your target price.
Another approach is to close part of your trade at the same number of points away from the entry price as the stop loss so you guarantee yourself a profit, and let the remaining portion run as long as possible to squeeze out as much profit as you can. You can move your stop loss to break even so this remaining portion left open doesn’t turn into a loss, and the worst that can happen is you break even.
Alternatively you could just let your profits run as long as possible and use technical indicators to decide when a trade has run it’s course. For example, if a trade goes into profit, you could move the stop loss to break even straight away and let it run.
All of these methods are used to some extent by all profitable traders, but the key lesson is to make full use of stop losses. You want to make your trading pot grow over time, and the best way of doing this is by cutting your losses early and letting your winners run. This way you don’t need a high percentage of your trades to be winning ones, you just need a small percentage of winning trades which are allowed to accumulate.
James Woolley has been trading currencies for around five years. He also runs a blog where he reveals all his best forex tips and strategies