Forex trading is all about maximizing your profit and minimizing your losses. In order to do this, no matter how good your carrying out of analysis and trading strategy is, you won’t see much success if you don’t employ good Forex trading tactics.
Tactics in Forex trading, is all about money and risk management. Money management is all about employing good money management techniques and stops are the best money management techniques you can use.
In order to cut your losses, you should place stops in the right places, according to your risk tolerance which would be specified within your Forex trading plan. When creating a Forex trading plan, you need to keep it fairly simple so that you can find it easier to stay disciplined and stick to it. There’s no point in trading currencies without a trading plan and there’s no point in having a trading plan without sticking to it.
If you don’t place stops in the right places, your losses will run and you will never last. Beginners especially, fail to understand that it is pretty much impossible to never see a loss. You need to realize that losses are inevitable in the Forex market and that you should simply try to cut them down, rather than trying to eliminate them altogether, which you won’t be able to do.
When you do a place a stop in the right place and you get stopped out, it means that you have cut your losses and exited the poor trade. Once you are stopped out, forget it and move on. You might want to look at where you went wrong and try to learn from any mistakes you made, but other than that you should just forget poor trades and get on with your next ones. Some Forex traders do set their stops in poor places, so if you are regularly getting stopped out you should perhaps consider moving them out a little if you feel that your actual investment decisions are good.
One mistake that many Forex traders make, especially beginners, is having their profits cut. You want to cut your losses; not your profits. So don’t try to use fixed stops with your good trades, because if you do happen to place a profitable order in the currency market, you want to be able to get as much profit out of it as possible. This is basically what is known as letting your profits run and in order to let them run, you need to employ trailing stops.
Trailing stops protect your profits and lock them in. Once you are in the green, trailing stops help to prevent you from going back into the red. So if you place an order and eventually reach a good +50 pips in profit, your trailing stop might be set so that if the trade starts going downhill, you might get stopped out once you go down to +40 pips, for example. Trailing stops move up only, so if your trade suddenly moved up to +60 pips in profit, your stop would move up so that you’d only get stopped out once your trade went down to +50 pips in profit. Trailing stops are very effective and particularly good for long-term Forex traders. They allow you to protect and lock in profits that you have already made, but they also allow you to keep trades open which are profitable, in order to help maximize your profits by letting them run.
In conclusion, money management is very important and a very important part of a trader’s Forex trading plan. Stops are the best money management techniques to use; more specifically fixed and trailing stops. Fixed stops are generally used to cut losses and trailing stops are generally used to let profits run. By employing both of these types of stops effectively, you can maximize your profits and minimize your losses.