Forex losses: a useful experience or an accident?

While any trading training, we are inspired that exact calculation and the correct actions of the trader is a guarantee of a stable profit. But nobody tells beginners that the probability of the Forex losses directly depends on the trading purposes reality which every trader defines for himself.

Have you wondered why this happens?

Intellectual laziness along with the expectation of the fast superprofit and also personal ambitions press on any trader and force to make rash acts.

For whom this article is?

For all those who:

… only started to trade and already loses money;
… already got the profit, but now for some reason loses money;
… steadily earns, but sometimes, after all, loses money.

Remember:

Nobody knows the 100% scheme how to avoid Forex losses, everyone and always has the chance of losses. Investment funds, industrial groups, leading banks, large «private regulators of the market» such as Soros or Buffett regularly lose the money.

But it happens to the «monsters of the market» most often for technical reasons, and is extremely rare – as a result of incorrect trade decisions. Their actions are based on the long-term experience, special knowledge, information and technical capabilities, but the most important – on a tough approach to the money management.

At each trading moment, the trader has to know precisely what exactly he sells (buys) at what price and what volume, but the main thing – why he trades in such a way, but not other.

So, the first step …

Control of the available funds level on the trading account

Let`s have a closer look at a standard situation which in all textbooks is called «discharge threat» or Forex losses at the open positions.

We will remind you a basic formula of the money remain on the trading account:

Balance = Means (Margin + Free Margin) + Profit/Loss

Until transactions are closed, only the sum of a free margin is changed (in the course of the dynamic profit it grows, at a loss – decreases).

Means is the sum of money which will remain on your account if you close at present all transactions including unprofitable.

Level of a margin has to exceed the limit set by the broker at which there is a compulsory closing of positions.

But here’s the problem:

the broker will never allow trade «on credit»: when the dynamic loss becomes higher than the margin call level, the system will automatically close all your orders (and at first – unprofitable but only then – profitable!).

At best, a consolatory sum (5-10% of a deposit) remains on your trading account, and at worst – absolute zero.

The first symptom can be considered falling of the margin level lower than 500.

What is the solution?

Stop trading and analyze the mistakes. You can switch to the demo account to train your money management techniques. Otherwise – adieu a deposit. ( Check here List of the trading losses)

Further, in order not to get into situations «Discharge threat», it is necessary for you:

Trading plan

… and it is obligatory to get the main and the additional trading plan.

We will surely cover this subject in a separate article, but for now, note the key moments:

The plan is formed not only for the direct trading actions, but also for the subsequent analysis.
The trading plan has to reflect the list of all actions under various conditions.
Consider the plan for the day trading and for the week.
Study features of the trading assets in which you plan to trade.
Develop the plan of the market analysis.

In the plan it should be described in details:

a technique of the input and output points definition, types of trade orders (market or pending), levels of the stops/profits.
market models for the intraday trading or on the bigger period (according to the strategy);
market models and templates favorable for the trade;
personal methods of the psychological fight against emotions.

Compliance with the trading plan – is obligatory. Before the opening of each transaction – you should be convinced that your trade algorithm allows such option of actions.

Further, we will need …

Statistics of the transactions

The post factum analysis of the trade operations gives you tactical information which allows to reveal mistakes and to strengthen the profitable moments. If not to do it regularly – a funeral of your deposit is not far off.

In the statistics analysis, we pay attention to:

quantity and volume of the transactions for the period;
an indicator of the risk/profit for 1 transaction and the average value for the month;
number of the trend and countertrend transactions;
percent of the profitable positions;
the average time of the open transaction;
the average value of a loss/profit for the period.

In the business world, the rearview mirror is always clearer than the windshield.
Warren Buffett

Risk management

Come back to the purposes which you set before the first transaction. Before the trade you should:

… find the answers for three questions for yourself:

the admissible volume of the trade lot;
the admissible risk for the one transaction (in % of a deposit);
how many unprofitable transactions can a deposit sustain at such risk level?

... and to calculate three values of the critical Forex losses:

for 1 transaction;
for 1 trading day;
for 1 week (or more).

If the sum of your losses is close to these critical sums – you should consider revising your trading decisions.

(check here also 10 Ways To Avoid Losing Money In Forex).

In addition to the wrong money management and psychological instability, the uncommercial reasons of the Forex losses include:

Unsuccessful choice of the broker

An arsenal of the unfair broker contains everything for your losses: absent transfer of the transactions to the interbank, incorrect quotations, requots, widening of spreads, extortionate commissions and delays with the withdrawal of money.

In the worst case – bankruptcy, disappearance from the market together with the money of clients.

What is the solution?

You should carefully choose those to whom you are going to entrust the money. For the detailed recommendations – read our following materials.

Advice, advisers and counselors

Influence of the various «gurus» from the Forex is the fastest way to losses.

Don't hope that you will be honestly told how to avoid Forex losses or someone will present (and most often – will sell!) a «wonderful strategy» or a «wonderful adviser» that will always trade in profit and at the same time will save you from decision-making, studying of the market and trading bases.

For this reason, we always advise the cautious traders: test any trading plan/strategy/idea with the help of the Forex Tester trading simulator and return to the live trading with the proven results backed by data.

How to double money on the exchange? The most reliable way is to fold them in half and put them in your wallet.
Frank Hubbard

What is the solution?

Listen to the advice and check them carefully, listen to the advisers and analyze, listen to the counselors – check and test. Open the transactions independently until you learn how to get profit, and at the same time – to give advice.

Trade on credit

The eternal truth about which many forget at the beginning and remember too late: not to trade on loan (credit) means or to put in the trade money you cannot afford to lose. No Forex experience does cost the loss of the personal property or welfare of the close people (see here loss control - interesting reasoning).

The strategy of investing depends on what is more important for you: it's good to eat or sleep well.
John Kenflied Marley

What is the solution? Open micro or the mini account on pocket money and learn to earn bigger sums.

More tips to strengthen the results

Disconnect your emotions: fear, greed, passion.
Choose a reasonable leverage.
Study on mistakes of others, but not on the losses.
Don't trade against the market.
Fix losses before they become critical.
Not too trust both technical indicators and the fundamental analysis.

And what is a result?

Look at it this way:

the undoubted advantage of Forex losses is that all quickly study on them.

If you already started the analysis of the transactions, then you correctly assess a situation, look for the reasons for failures in yourself and in the trading strategy. Then you have a chance to find mistakes still before they turn into financial problems and to remove the deposit from the razor edge.

Try It Yourself

Trading psychology is one of the essential pillars of the Forex success, so even if you are an experienced trader, you shouldn’t dismiss a trading psychology advice.

Do you need a comfortable space in order to take control over your emotions and get prepared to the live trading?

Simply download Forex Tester for free. In addition, you will receive 23 years of free historical data (easily downloadable straight from the software).

Grow your patience, boost your trading skills, learn to avoid psychological traps without drawing your live account.

Share your personal opinion how did you manage to minimize Forex losses. Are there any experience you want to share?

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