October 27, 2013

Knowing When to Cut Your FX Rates Losses

Cutting FX Rates Losses

This article looks at when you should be cutting your FX rates losses.

When you trade on the FX rates market you need to know about when you should cut your losses.  If you do not know how and when you should cut your losses you will only add to the losses.  There are a number of different methods that you can use to determine when you should cut your losses.  These methods will include having a set loss amount per trade, using the exit strategies set out by the strategy that you use and playing it by ear.

Having an FX Rates Loss Limit

The first way that you can determine when to cut your FX rates losses is through the use of a loss limit.  This loss limit is also known as the risk per trade that you are willing to take.  This amount should be detailed in the risk management and money management plans that you have for your trading.  The most common limit that traders use is 2% of their trading account balance.  There are others traders who use a lower amount and this will be due to personal preferences and risk aversion.

When you use this method of cutting your loss you need to stick to it.  The best way to do this is to set your stop loss order at the loss limit.  This means that you are going to have to determine the price on the market where you lose 2% of your trading account balance.  When you do this you ensure that you are always sticking to your trading plans.

Using the Strategy Exit Plan

There are many forex trading strategies that have an exit point.  These exit point will be where the strategy tells you to place your stop loss order.  Of course, not all strategies will have these points and you need to consider this.  If your strategy does offer you a loss exit strategy then you should use it.  This is due to the fact that the exit is part of the strategy and you need to stick to all parts of your strategy.

The use of these exit points is ideal because they are related to your trading strategy.  This means that the movements that your strategy is looking to take advantage of will be covered by this.  There are many strategies that offer limited profits if you do not use the exit points that they recommend.

Playing it By Ear

There are a lot of traders who decide that they are going to play their exits by ear.  This is actually not recommended as it is considered to be a type of emotional trading.  When you do not have a set plan for the cutting of your losses you could fall into adding to your losses.  In order to play the cutting of your losses by ear you will need to have a loss range.  This loss range will be a level where you consider the closing of your trade.  When the trade reaches this level you will need to analyse what the market is doing and how likely a turn will be.  If there is no hope of a turn then you will need to close the trade and cut your losses.



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