by Rob Booker
Trading currency is risky. You can sustain the total loss of your trading capital.
In the midst of one of the most volatile periods in the forex market in the last 10 years, what are you doing right now to protect your capital? What are the top 10 ways you, every day, manage your risk? Your trading account doesn't represent just the $500, or $1,000, or $100,000 that you have deposited. It represents possible future gains (or losses, of course). If you deplete all that capital on reckless trades, what will you have left to trade with?
It's always better to sit on your trading capital than it is to use it recklessly.
Big moves in the currency markets are exciting, for sure. Everyone seems to love a trend and loves even more to talk about how they caught a big piece of it. But we all know what it feels like to take one too many trades, or to risk too much on a single position, or to try to pick a bottom (or top) in the market and then find ourselves losing a significant amount of money.
Are you currently riding losing positions? Here are some thoughts.
I can't tell you whether you should open or close any specific trades. But as you think about your trades, consider the following questions:
I take a lot of flack at times for suggesting that you are better off speaking openly about your trading mistakes with other people. I don't say that because I delight in hearing about your mistakes. I do it because if there is any possible way that you can find your way out of the losing trades you're in, isn't it worth it to actively and openly try to find that solution?
Are you currently experiencing unusually large gains?
Here are some thoughts.
There is nothing quite like the joy of making a good trade. We like to be right. We enjoy the thought that we planned, executed, and closed a position successfully. Here are some thoughts if you've recently found yourself in this fortunate circumstance:
Most of all, please don't become so accustomed to this huge market movement that you expect these huge trends to come along every week of the year. We are experiencing volatility that is off the charts, that is higher than anything we've seen in a long time. Most of the time, the market does not move like this - so please do not start to expect that the GBP/JPY is going to move 1,000 pips every day for you.
- How does your current loss compare with what you expected to lose, based on the testing of the system you are trading?
- If your system is not tested, and you do not know what the expected rate or size of losses should be, what can you do right now to find that information?
- Have you shown your account to someone that you trust, an experienced trader, who can help you look at your positions and talk about them?
- If you feel ashamed of having lost a great deal of money, consider what you can do to face that embarrassment head-on: it is better to deal uncomfortably with a loss in the open than it is to privately blow your entire account. Any pride you feel that you are protecting by not talking openly about your mistakes will, in the end, be a very expensive investment.
- Remember that everyone has experienced losses. Even significant ones. Warren Buffett's company Berkshire Hathaway is named for the textile company he invested in that became a sinkhole for money and cost him a great deal of time, effort, and capital. Any successful trader you speak to will frankly discuss the worst trades they've made and what they learned. These experiences have been, in some cases, more instructive and meaningful than even their most profitable trades.
I take a lot of flack at times for suggesting that you are better off speaking openly about your trading mistakes with other people. I don't say that because I delight in hearing about your mistakes. I do it because if there is any possible way that you can find your way out of the losing trades you're in, isn't it worth it to actively and openly try to find that solution?
Are you currently experiencing unusually large gains?
Here are some thoughts.
There is nothing quite like the joy of making a good trade. We like to be right. We enjoy the thought that we planned, executed, and closed a position successfully. Here are some thoughts if you've recently found yourself in this fortunate circumstance:
- Well done! Congratulations on the profitable trading!
- Remember that your profits are only "on paper" until you take them out of your account. A close friend of mine accomplished the nearly unbelievable feat of earning profits of over $60,000 in his trading account earlier this year. He sadly lost all but $3,000 of that money, in a margin call, in just a couple of weeks - as he let the entire account slip away by making trades that were far too big. Princess Leia once told Grand Moff Tarkin, "the tighter your grip, the more star systems will slip through your fingers." Substitute "pips" for "star systems" and you have yourself the beginning of a good book about trading psychology.
- It's easy to fall prey to the worry that you did not hold onto your winning positions long enough. Be careful about being ungrateful for the winners that you do have. Don't let what you didn't get spoil what you did get.
- Just because you've had some good trades does not mean that you have "figured it out." There is no holy grail of trading. Every trading system has its weaknesses. Be careful not to concentrate so much on the good points as to not pay attention to what can go wrong.
- Consider using part of your profits as a "Research and Development" budget. With your profits, you may have bought yourself some time to test, fine tune, or otherwise improve your trading skills. I'm not saying you should spend your money on education, or books - or spend any money at all. Perhaps the profits simply give you some breathing room to sit back and deeply think about what you did that got you to this point where you have experienced some success. Learn from your success!
Most of all, please don't become so accustomed to this huge market movement that you expect these huge trends to come along every week of the year. We are experiencing volatility that is off the charts, that is higher than anything we've seen in a long time. Most of the time, the market does not move like this - so please do not start to expect that the GBP/JPY is going to move 1,000 pips every day for you.
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