Exhilarating and challenging at the same time, the forex market is one of the most difficult to break into. One wrong step, and you can lose everything you have made. Thus, you should take careful steps after performing a thorough analysis. However, handling multiple aspects of the forex market can be complicated for a trader. You might not know where you went wrong. A flaw in your trading strategy? Maybe you are relying too much on your indicators. Or you are failing to take charge of your emotions.
So, even though different traders take a different approach, most share the same common problems that lead to losses. In this article, we will talk about five things that will cut your losses and improve your profits.
- Pick a Trading Method and Perfect it
All successful traders earn in the market for one reason: A profitable trading system. Unfortunately, only 2-3% of traders in the market have a trading system that gets them results. And it is the first thing you must review if you are not seeing good results.
Before creating or reviewing your trading system, check how well it fits your style. Based on your trading preferences—scalping, day trading, swing trading, or long-term position trading—make a trading system that aligns with your goals. Also, include trading tools in your trading system, like different trading calculators that can help you figure out the right values to trade with.
Also, take your time building your trading strategies. Jumping between different strategies can lead to confusion and poor decision-making. Instead, focus on one approach, study it thoroughly, and practise it until you become proficient.
- Learn To Trade On The Higher Time Frames
Many traders get caught up in the frenzy of short-term trading on lower time frames, such as 1-minute or 5-minute charts. Although this can be profitable if you know your way around the market, new traders should avoid it. Because this approach requires quick thinking, it can lead to emotional decision-making and impulsivity, often resulting in losses.
Instead, consider trading on higher time frames. You can use a 4-hour or daily chart, for instance. Higher time frames provide a broader perspective of market trends and reduce the noise and volatility of lower time frames, leading to more informed and rational trading decisions.
- Stop Watching Charts All Day Long
It is a good strategy to keep track of the latest happenings in the market. But you are burning yourself out if you constantly monitor the Forex charts. Stop now if that’s you! It can lead to overtrading, impulsive decisions, and emotional trading.
A good way to eliminate this bad habit is to study and analyse the market when you are about to trade. Set specific trading hours.
This practice helps you maintain a healthy work-life balance and prevents burnout. Analyse the market during trading hours, execute your trades, and then step away from the screens until the next trading session.
- Only Trade With Money You Can Afford to lose
It is not new news that forex trading is full of risks. There is a common misconception among new traders that the more money you risk, the more you will make. Fueled by greed, many traders use this method, and they end up blowing up their trading accounts. The problem here is a lack of trading knowledge. Whether you are a newbie or an experienced trader, you can’t risk more than you can afford to lose.
So, if you think you are making heavy losses, you need to reduce your risk percentage. To avoid losses, traders should use a 2% risk management rule. As the name suggests, traders should only risk 2% of their trading capital. To better understand the trading margin, you can use a margin calculator. This will help you determine the right amount you should trade with, hence minimising the chances of a blown-up account.
This approach reduces the emotional burden of potential losses and helps you trade more objectively and make rational decisions. Set a budget for your trading capital and adhere to it strictly.
Here are some other ways you can reduce your losses:
- Diversify Your Portfolio
- While risking only money you can afford to lose is the golden rule for reducing losses, there are other ways to lower your losses. There are different trading instruments on the market, each carrying its own risk. Although a trader can choose to trade any pair, it is recommended to trade pairs that are more stable and have less risk.
- If you are starting, major pairs are perfect to start with. But if you have been trading for a long time, you should trade multiple pairs. This will not only open more doors for earning a profit but also reduce your chances of losing more.
Additionally, consider trading different strategies or using various time frames to spread your risk further. A well-diversified portfolio allows you to capitalise on multiple opportunities in the market and reduces the chances of significant losses from concentrated positions.
- Set Realistic Expectations
When was the last time you thought if you could take more risk, you would make more money, but you ended up losing your trade? All traders, regardless of their expertise or knowledge, face this problem. Why doesn’t this work? Lack of emotional control and unrealistic expectations are two causes.
Thus, avoid chasing unrealistic returns. It will only lead to trades requiring excessive risk-taking, emotional decision-making, or both. Just focus on capturing a few pips and closing the trade. For this purpose, a pip calculator can come in handy, allowing them to calculate the pips according to their lot size. Traders often lose sight of their long-term goals because they are too fixated on short-term gains. A disciplined and patient approach will lead to more sustainable and successful trading outcomes in the long run. Instead, set achievable goals based on your trading strategy. And follow risk management principles.
- Continuous Learning and Improvement
Constantly evolving with time, the Forex Market is regularly updated with new information. If you can’t keep up with the latest information and strategies, you will fall behind in the rat race. Invest in your education by attending webinars, workshops, and seminars conducted by experienced traders and industry experts.
Be curious and inquisitive about learning. Find out what is working fine or what’s stopping your trading system from giving positive results. A demo account is appropriate for this purpose. Strategise your strategies from time to time and make them better.
- Work on Your Mindset
Are you stressed out when trading? Do you think you can’t close a trade without thinking about all the different ways it could go wrong? Emotional intelligence and control are two of the strengths of successful forex traders. If you are facing such problems, you need to take a step back and take a new approach.
Write down all the emotions you experience during your trading, good or bad. Then, you need to focus on controlling them. Mindfulness and self-awareness are helpful in recognising and controlling your emotions while trading.
Traders who trade with a trading plan with predefined entry and exit points and risk management strategies can better manage their risk. Also, as discussed above, a trader should set realistic expectations and learn from their failures.
Forex trading can be rewarding if approached with the right strategies and mindset. In this article, we have discussed five things traders can do to stop losing money in forex. Successful trading is a mix-up of your technical skills and emotional control. The latter makes the former better. The first thing that a trader can do to trim their losses is create a robust trading system that produces consistent profits. Some other things that are helpful in reducing losses are emotional control and setting clear and concise trading goals. If you implement the above solutions, you can reduce your risks over time.