Using Stop Losses to Manage your Money

Most seasoned forex traders will be more than happy to tell you about their big winning trades, but not so many will be forthcoming about their worst losing situations. Nevertheless, how you lose money as a forex trader can be even more important than how you go about making it.

For example, failing to cut losses on a losing position can easily wipe out the trading account of a forex trader who does not have deep pockets and plenty of patience. This is the case due to the high volatility and unexpected market moves often seen in the forex market.

Less harmful to a trader's account by a considerable degree, although still clearly significant, will be how well they manage their winning trades.

The following sections will cover some of the key elements of why good forex trading technique involves taking losses promptly and while they are still at a manageable level.

Good Trading Means Taking Losses Early

Virtually all traders have to go through tough times where a string of losses seem to appear from out of nowhere. This phenomenon can often cause great distress, especially among new traders. Without a proper money management strategy, a string of losses could be enough to put a trader out of business, and in many cases it has.

Professional traders generally keep well aware that they may run into a series of losing trades, which is why virtually all profitable trading plans contain a money management component. This key part of any trader's system will usually include such items as how to perform position sizing and where to place stop loss orders to manage risk.

Losing Trades: Cut Your Losses Short

By cultivating a reasonable fear of losing more money, this tends to prompt a trader to take immediate action to get out of losing trades at a small loss, thereby leaving them free to re-assess the market.

This would be a typical response for a more experienced trader who has learned - perhaps the hard way - that taking a small loss right away is far better than swallowing a large one that may develop by waiting.

In addition, depending on the flexibility the seasoned trader has in their trading plan and mentality, they might even choose to reverse their original position. They would do this by closing the initial trade and positioning a new trade on the opposite side of the market than they had originally dealt.

This sort of mental flexibility often requires considerable cultivation, but it can be extremely helpful when trading a market that disagrees with your original directional assessment of it.

The Moral of This Article is - Use Stop Losses

Many experienced forex traders will regularly place stop loss orders as soon as they initiate a trading position. This provides them with an effective way of limiting any trading risk to their portfolio that might come from an unanticipated adverse market movement.

While some traders do prefer to watch their stop loss levels themselves instead of entering orders with a forex broker, this can result in a costly loss of trading discipline, so it is usually not recommended for newcomers to forex trading.