Forex Secret Tips #63 -- Establish Stops And Heed Them Always

The Forex trading tip offered in this article is so important that it would determine at the outset if the Forex trader will make it in the markets. It is almost a secret Forex tip, accepted and practised by every successful trader. The new Forex trader should learn and use it straight away as a key ingredient for Forex success.

In Forex trading, much like trading in other markets, stops are an important element for successful trading. The stop is a simple yet effective tool that gets you out of a losing position. It is a way of admitting that your view of a particular Forex trade is incorrect and it is time to cut loss. Provided it is managed correctly, that is. But traders are human after all, so they are susceptible to letting negative human behaviours wield their influence.

Most people cannot take a loss. When money is at stake, emotions and ego without fail are involved too. So when the Forex trader is confronted with a losing trade, the natural tendency is to hang on to it and think the market will soon recover to prove his judgment right. It is a fact that Forex prices often move within bands, so this might convey the idea that a rebound is forth coming. But it is also true that when prices start to trend, they can break out and blast away, thus widening a loss substantially.

In reality, the Forex market reacts mainly to supply and demand factors. When you are betting that prices will move one way, there are other traders that are taking the opposite view. The market has no bias whether you went long or short in any case. But because you are playing with your money, you can become emotionally attached to your positions and be convinced that the market involves itself similarly.

For most traders, it is the idea of profits that fill their minds, so they are quite certain when they should take profits. Since they do not prepare for the event of a loss and hence are mentally not accepting it, such traders often freeze up when faced with losing trades. During such times, they let their emotions take control and start hoping for prices to reverse, rather than taking the difficult step of closing out losers.

At times, a losing Forex trader will get lucky and actually manage to squeeze out a profit. This has the unfortunate effect of stroking the trader's ego and making him believe he can beat the market. This trader persists to trade with an unchanged mindset and attitude, repeating the same mistake of not cutting losses quickly. Eventually, the Forex trader takes a huge loss, desperately.

The correct thing to do is to establish a "pain" point for every Forex trade, the price level at which you would accept the trade idea has been invalidated and you would quit the trade. This stop level must always be known before a trade is taken and it should become committed to a working order once a trade has been filled. The trader can select between entering an automatic stop order or keeping a mental stop.

Automatic stop orders are certainly much better as you are making rational decisions upfront -- when your Forex trade is not working out, you take your losses then and there. Though mental stops can be appealing, the trader can sometimes be seriously challenged during fast moving Forex markets, to the extent that the urgency to cut loss becomes questioned. Quitting losing positions when mental stops are hit is usually ignored by most traders; worst, traders might convince themselves to widen stops so as to stay in their trades.

Accepting bad trades and dealing with them are part and parcel of the Forex trading game. No doubt, it feels easier to stay with a loser and harder to take an immediate loss. However, not dealing with losers is a self-destructive attitude that will destroy the Forex trader, more often sooner than later. Always know where your stops are in advance, exercise them expeditiously and heed them without hesitation.

When you are confronted with a losing position, it is not just money you are losing but more importantly, you are losing your objectivity as a Forex trader. When you let personal feelings such as fear, hope or revenge affect your judgment, you fall into a deeper hole from which it becomes even harder to climb out. Using stops detaches your ego from the trading equation, thus taking control of your emotions and saving you from mental anguish.

Only when you do not have losing positions hanging over your head can you then regain your mental capacity to plan for and execute new trades. By employing stops to control your losses, you conserve your trading capital and give yourself the possibility to take the next high-probability trade. Acquire and build on this positive behaviour to secure your success in Forex trading.