Everyone from complete market novices to seasoned pros with years of expertise is drawn to the global forex market, the biggest financial market in the world, and the promise of lucrative rewards in this sector.
Due to the market's accessibility (24/7 availability, high leverage, and cheap fees), many novice forex traders rush into the industry, only to quickly exit when they start losing money. At times, market conditions might change quite quickly. Volatility presents numerous chances for large winnings, but it also has the potential to cause substantial losses.
Restoring faith following a devastating loss is a challenge that many investors have experienced personally. You may lose faith in your trading abilities if you experience losses, particularly large ones. If you have been hesitant to trade due to past losses caused by difficult market conditions, you may find the following helpful.
Handling losses in forex trading is crucial for long-term success. This guide offers practical tips for South Africans to manage risks, stay disciplined, and refine their strategies.
Do Proper Research
Despite the ease of entry into forex trading, it is crucial to conduct thorough research. To be successful as a trader, one must learn about forex. While hands-on experience and real trades are the best teachers, every trader should arm themselves with information about the foreign exchange markets and the economic and geopolitical aspects that influence their chosen currencies.
Traders must constantly react to shifting market conditions, regulations, and global events, making research an ongoing effort. An integral part of this study is making a trading plan, which is a methodical approach to finding investments, assessing their merit, deciding on an appropriate level of risk, and outlining both immediate and distant financial goals.
Learn From Your Mistakes
Successful traders know their own limitations and work to lessen them. Always conduct a post-trade analysis to learn from your mistakes, no matter how big or minor, so you can avoid making the same mistakes in the future. Has my research been incomplete? Were my decisions influenced by my emotions?
Let's say you possess a skill for relying on fundamentals when making buying and selling decisions, and you have a meticulous approach to selecting stocks for investment. If you do that, you risk missing out on some promising early-stage development enterprises.
If you're a headline trader, chasing showy stocks could burn you while more conservative traders succeed. The blunder was the same in both instances: the trader missed out on profitable opportunities because he or she was too set in their ways. The takeaway from both situations is the need to be flexible when it comes to choosing and assessing potential trades.
Use a Reliable Broker
Dealing with a less-than-reputable forex broker is a possibility because the forex industry is subject to far less regulation than other marketplaces. Forex traders should only open an account with a company that is registered with a reputable financial body with strict rules and regulations.
Every country has its own regulatory body with whom legitimate forex brokers should register. Additionally, traders should investigate the account offerings of each broker, including account funding and withdrawal procedures, leverage amounts, commissions and spreads, and initial deposits. Any concerns about the company's services and policies should be answered by a kind customer support agent who is knowledgeable about them.
In South Africa, brokers should be registered by the Financial Services Conduct Authority (FSCA).
Use a Demo Account
Traders should first register for a practice or demo account that comes with almost all trading platforms before starting to trade on a live account. A trader can practice their order-entry skills on a demo account, which is arguably its most significant advantage.
Pressing the wrong button when establishing or closing a position can have detrimental effects on a trader's bankroll and self-esteem. For instance, a novice trader may inadvertently prolong a losing position rather than exiting it. Large, uninsured losses can result from several order input mistakes. Trading blunders are extremely stressful on top of having disastrous financial consequences. Execution is the key. Before you risk any actual cash, try out different order entries on a demo account to see what the effect is.
Protect Your Trading Account
Learning how to prevent losing money is just as vital as learning how to make money in forex trading. As part of the procedure, you must employ appropriate methods of managing your finances. Anyone can take a position at any price and still earn money. What matters is how one pulls out of the transaction, according to many seasoned traders.
Admitting defeat and moving forward is a crucial aspect. An effective method to ensure losses stay at the minimum is to always use a protective stop loss. Using a stop-loss order or limit order, this strategy aims to maintain existing gains or prevent further losses. If a trader's daily loss totals more than a certain amount, they are required to terminate all open positions and refrain from making any more trades until the following trading session.
Protecting gains is just as important as limiting losses for traders. Using trailing stops, a type of stop order that can be put at a percentage away from a security's current market price, is one money management approach that can assist traders in protecting profits while still allowing potential for growth.
Start Small When Starting to Trade Live
Once a trader has completed their research, gained comfort with a practice or demo account, and developed a trading strategy, they logically proceed to trading with real money on the line. Trading simulations cannot replace actual trading. Thus, it is critical to begin with a small amount while going live.
You can't completely understand and account for factors like emotions and slippage (the difference between the predicted and executed prices of a trade) unless you trade live. Furthermore, a trading strategy that was wildly successful in practice or back testing may collapse in the real market. A trader can assess their trading strategy and emotions, as well as their ability to execute exact order entry, by beginning with smaller trades and gradually increasing their risk tolerance.
Use Reasonable Leverage
The amount of leverage available to players in forex trading makes it unique. Active traders are drawn to forex because it offers the possibility of making significant gains with a relatively small initial investment, sometimes as little as $50. Leverage does offer the possibility of growth when used properly. However, losses can also be bigger due to the leverage.
By basing position size on the account balance, a trader can regulate the amount of leverage used. For instance, a trader with $10,000 in a forex account might use 10:1 leverage on a $100,000 position (one standard lot). A smaller position will reduce risk, even though the trader might establish a much larger position if they wanted to maximize leverage.
Keep a Trade Log
One useful tool for learning from forex trading mistakes and gains is a trading log. A trader can become more effective by keeping a record of their trading activity, which includes dates, instruments, gains, losses, and—perhaps most importantly—their own performance and feelings. A trading log, when reviewed on a regular basis, offers valuable feedback that facilitates learning. A trading journal and proper record keeping are essential for traders to avoid repeating their mistakes and increasing their chances of success.
Know How Tax with Impact Your Trading Activities
To be ready for tax season, it is critical to comprehend the tax ramifications and treatment of forex trading activities. People can benefit from a number of tax rules, including marked-to-market accounting, which records an asset's value to reflect its current market values, and avoid any surprises by speaking with a certified accountant or tax specialist.
Trading Is a Business
Treating forex trading as a business and keeping in mind that short-term gains and losses are irrelevant are crucial. What matters is the trading business's long-term performance. As a result, traders should aim to keep their emotions in check and view each success and loss as just another workday.
Forex trading has costs, losses, taxes, risk, and uncertainty, just like any other business. Additionally, most forex traders don't become successful overnight, just like tiny businesses don't. A long, prosperous career as a forex trader can be ensured by planning, establishing reasonable goals, maintaining organisation, and learning from both successes and disappointments.
Slowly Start to Rebuild
Even though you may want to get back in after some losses, consider playing smaller roles. For instance, if you typically never risk more than 5% of your trading account on a single trade, you may lower that to 2% or 3% after suffering a significant loss until you feel secure. This is particularly true during times of high market volatility, when significant fluctuations can swiftly force you out of the market.
Similarly, you may start with 20 shares and gradually increase your position if the price drops, rather than buying, say, 100 shares of a new position. Selling a winning position is no different: If the stock is continuing to rise or you've hit your barrier for a single investment in your portfolio, you could scale down by selling in increments of 10 or 20 shares. By trading in chunks in both situations, you would be reducing your risk and your possible regret. Setting price targets for your exits in advance, even if they are incremental, can aid this technique.
Use Limit and Stop Orders
By implementing limit and stop orders, you can remove emotional factors from trading and ensure that you adhere to your exit strategy. Limit orders let you set the maximum and minimum prices for buying and selling shares. No matter what, the deal will only go through if the price you've specified is met, or better.
We convert stop orders into market orders and execute them once we reach or exceed a certain price level. The execution price is not guaranteed, and the trade could happen below, at, or above the stop price.
With these resources at your disposal, you'll be less likely to overpay for a hot stock or hold on to a position for longer than intended. However, neither the fill rate nor the price you specify will be guaranteed by a limit order or a stop order.
Conclusion
Many traders find the global forex market appealing due to its cheap account requirements, 24-hour trading, and high leverage availability. Forex trading can be lucrative and fulfilling when seen as a company, but it can take a long time and be very difficult to achieve success. By taking precautions against losses, such as conducting research, avoiding overly leveraged positions, employing prudent money management strategies, and treating forex trading like a company, traders can increase their chances of success.
