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How to react to a loss in forex?
Written by: PaxForex analytics dept - Tuesday, 25 November 2014 0 comments
Facing a trading loss is as much part of trading forex as analyzing the charts for a trade, following economic developments for fundamental signals and earning money. Many traders feel uncomfortable with taking losses which can lead to even greater losses. This comes down to trading psychology and too many forex traders do not take into account that they need to learn how to deal with a trading loss effectively. This needs to be learned over time, but the sooner new traders will start to familiarize themselves with trading losses the better.
It is impossible to get every trade right, which means every trader will face trading losses. Those who claim they trade free of losses are either not telling the truth or are not trading at all. Not knowing how to handle a loss or letting it run often leads to a much greater loss which will leave the forex trader at a worse shape than accepting a loss. This is the biggest reason why taking a loss after a trade has moved against the conducted analysis is beneficial to the forex trader.
When to accept a loss is a crucial, but at which point a trader should accept a loss is dependent on the strategy which was used in order to analyze the currency pair. Every trader uses a different trading strategy and an exit strategy should be
part of any strategy. An exit strategy should define when a trader will close a trade for a profit and when to accept a loss. The entry level of a trade will determine the exit points, both for profits and losses, which make the analysis a crucial factor.
How to react to a loss in forex? It is natural that new traders will go through a range of emotions which means they are no longer able to think rational. This is the worst time to sit in front of your trading terminal in order to continue trading. The reason behind this is that an emotional trader often makes worse decisions after a loss or engages in revenge trading in order to recover the loss. This leads to more losses in addition to the initial loss and leaves the forex trader in a dire trading situation. When a trader feels emotions are taking over the best thing to do is stop trading.
Number one is to remove yourself from the trading environment. Leave your terminal, have a cup of coffee, go for a walk outside or do whatever else necessary for you to clear your head. You should not return until you have a clear head which will allow you to make rational trading decisions. Stay away from revenge trading as it will often take even more from your trading account. There was a reason you lot on a trade, your analysis was wrong so do not take the same trade again. Analyze your loss and learn from it for the future.