Perhaps one of the most time honored and popular sayings among forex traders has a number of variations along the lines of the following words of wisdom:
“Cut your losses short, but let your profits run on.”
This forex trading maxim has roots going back over a hundred and fifty years and pertains to trading in just about any financial market.
The basic idea behind the saying is to encourage traders to get out of losing trades quickly but to cultivate the patience to stay in their winning trades in order to let trading profits accumulate over time.
When it comes to following this guideline when trading forex, a trader needs to learn to manage their normal human emotions that might interfere with them cutting losses and letting profits run successfully.
Remembering these wise words has kept many a novice trader from blowing out their trading accounts before they had time to become successful.
Cut Your Losses Short: Manage Your Risk Wisely
Maybe no one ever goes broke taking a profit, as another well-known Wall Street trader saying implies. Nevertheless, a large number of former forex traders have managed to completely wipe out their trading accounts because they did not have the discipline to take what would initially have been a small loss quickly.
Managing risk responsibly by keeping losses small makes up one of the most important money management activities in a trading strategy, and most successful forex traders learn to employ this concept strictly in their trading activities.
In most cases, successful traders will manage their risk when trading forex by entering a stop loss order immediately upon taking a position. This allows the trader to control their risk to a certain degree on each trade they take.
Exchange rates can behave extremely erratically at times, especially after monetary policy shifts, major news announcements or central bank intervention. As a result, being prepared for the worst that can happen can ultimately save a forex trader both money and frustration in the long run. To have a degree of mental flexibility can really help when trading markets that disagree with your initial assessment of their direction.
Let Your Profits Run On: Allow Profits to Accumulate
While managing risk is very important, you will make an unlikely candidate for a successful forex trader if you do not allow your winning trades to run their course and earn you the big money that the forex market sometimes offers.
The key to doing this is to remember that once you have a winning position, you then need to cultivate the patience to allow for the position to mature into a sizeable gain, without giving into the temptation to rush in to take your profits too quickly.
Also, a useful strategy that successful forex traders use to protect their accumulated profits involves using a trailing stop loss order that will get you out of the trade once the market has reversed substantially.
Trailing stops makes up one of the primary techniques used by successful forex traders allow their profits to accumulate over time. Using them also has the distinct advantage of helping prevent winning trades from turning into losers, which forms the basis of yet another popular Wall Street trading maxim.
Furthermore, having a string of winning trades can sometimes boost the confidence level of a novice trader to the point that they start to overtrade.
This common trading error can seriously impact the trader’s lifestyle – not to mention their trading account – especially if they get caught up in making unprofitable trades and start chasing the market to make up for their accumulating losses and excessive commissions.
Learn to Maintain Discipline Whether Winning or Losing
Trading in an objective and disciplined way based on a sound trade plan is far likelier to be profitable in the long run than allowing your emotions to rule your trading responses. Nevertheless, doing so takes time and diligence to put in practice, although it will generally be well worth the effort.
Basically, learning to understand, anticipate and manage your emotional reactions as soon as they develop will save you both money and frustration when trading forex.
After all, trading is a business, and to stay in that business for any length of time, you will need to figure out how to make money and be satisfied with the process of doing so.