If You Don’t Stop Your Trade, No One Else Will

Today, I was browsing over at the ForexFactory.com forums and I read a post from a trader (most likely newer) who went short on a currency pair way too soon and was down over 220 pips and counting. And he’s still in the trade. Sadly, this is a recurring theme with newer currency traders.

He thought the pair could go down and it went against him. That by itself is not the worst of crimes. We all make mistakes. You just get out and go to the next trade. Unfortunately, this trader failed to exit the trade and didn’t have a stop-loss in place. Ouch.

And as of this writing, he’s still in the trade hoping for a miracle. What’s worse is that he caught a good break and got back to a point where he was only down about 35%. Right then and there he should of pulled out and moved on. Again, he didn’t and the pair may be resuming its uptrend. I can almost smell the account blowup from here.

Hey, we’ve all had a trade get away from us (raising my hand), but what separates those going onto better things from those who won’t is the ability to learn from mistakes. If you’re new to Forex or just getting started, please pay attention to these three rules.

Rule One: Know Why You’re Trading

One thing I see on Forex forums a lot is people treating the market like a casino. Rather than researching or coming up with an idea of their own for a trade, they just wait for someone in the crowd to yell “bet black!” and they throw down their hard-earned capital on the table.

Hey, there’s nothing wrong with getting advice from someone. But, if you don’t know the why behind the trade, you’re heading for trouble.

Rule Two: Have Targets

Before going into a trade you should have a rough idea (if not an exact one) of where the currency pair is going. You should definitely have a loss exit plan in place. In other words, get into your mind the exact point that you must exit if the trade goes against you.

For example, let’s say I’m going to trade the EUR/USD, which is trading at 1.2266 right now. I want to short it (this means I’m buying the dollar and selling the euro). My target is 1.2200. Given this, I’m willing to let the currency pair run against me up to about 1.2300. In the unfortunate event that I’m wrong and this pair hits 1.2300, I exit my trade no matter what. It doesn’t matter if I think it might come back. I’m done. I was wrong, time to move on.

Rule Three: Stop Wishing & Turn Out The Lights

I think exiting a losing trade is perhaps one of the most difficult psychological hurdles to overcome. And this is why unsuccessful currency traders normally have this habit. It’s one thing to actually have a stop-loss idea in place, but it’s another to actually exit the trade when that point is reached. Using an automated stop-loss via your trading software (and leaving it alone) can help you. As a rule of thumb, you should only ever improve your stop-loss, not expand it.

If you want to see my worst trade, go here (opens in new window). Talk about a nightmare. Still, it was a rite of passage in a way. Once that happened, I “grew up” and changed everything.

While sometimes a trade will come back for you, more often than not it’s going to get a whole lot worse first—especially if you’re down a serious pip count and going against a trend.

The Good News Fairy

Getting back to the unfortunate trader I’m speaking about. He actually has a golden opportunity today.

If he’s able to get out of the trade, take a break, learn from his mistakes and trade better because of it, he will have scored a huge win, not a terrible loss.

Remember, always have an exit strategy and get out when you’re supposed to get out.