It is not a popular subject, but a vital part of any forex trader’s currency trading education is knowing how to lose well. Forex trading is extremely risky and losses are inevitable at times. Everybody hopes that big losses will not happen to them, but sooner or later they will.
The secret to success in currency trading is not knowing how to win all of the time, because that is impossible, but knowing how to deal with losses. Whether it is one big loss or a run of small losses, there will be times when the account balance takes a beating.
If you are thinking, ‘This will not happen to me,’ then there is a big risk that you will not recover from a loss. Being unprepared is likely to lead to emotional swings and bad decisions such as making unwise trades or taking big risks in order to try to recover the loss as fast as possible. Clearly that is likely to end in disaster.
On the other hand if you are prepared for losses with good currency trading education, you will be in a much stronger position. First, you will not lose faith in your system if you understand its average wins, losses and drawdown (the low point that your account balance is likely to reach between two highs).
Understanding these factors makes it more likely that your account will survive a bad run, because you will have been adjusting your risk to take account of the possibility.
Second, if you know that any trade could be a loser, you will always set a stop loss at a reasonable point. Beginners often tend to hold on to a losing trade hoping that it will turn around and come right.
Sure, sometimes it will, but on the occasions when it does not, you can just go on losing more and more until your broker closes out your trade because there is very little left in your account.
Never let that happen! No matter how strong the signals, always set a stop loss. The forex market is unpredictable at heart and no system is infallible.
Generally our currency trading education will tell us to stick with a system through losses and gains, but sometimes, of course, there may be a lesson to learn something from a series of losses.
If you have a bad run right after starting to trade live, it could be a sign that you were not ready to go live and you are making mistakes, or your system was not adequately tested in demo. Proceed with caution, being sure to follow all of the rules of your system to the letter.
Now and then, market behavior may change in a way that means a system stops working for a while. Even this is an opportunity for learning. If you decide that your system might need tweaking, go back into demo mode or stop trading for a while and look for more currency trading education.
