Successful Traders Cut Losses Early and Run Profits Longer

There's a fatal error in our human nature. When we make decisions, we want to be right. It's instinct. It's also one of the fundamental reasons that successful traders are able to make money. They know when to call it quits, and they go against what their brain is signalling to them to hold onto. When you place your trade, you do so because you're confident that that's the move the market will head. You make a decision on a currency pair, place your buy or sell trade, and wait for it to become profitable. Big Mistake! Never wait it out unless your trade is profitable. In that case, run the profits as long as possible. The instant the trade goes against you though, be sure that you have the will power to call it quits and accept you got it wrong, or accept it's just not your day. There's many a trader has this problem and it's the reason they win on the majority of trades, and yet continually see their accounts dip lower and lower. That reason is because they're either running profits short, feeling it's about to turn the opposite direction, getting cold feet and calling it… or it's when the market goes against them and not wanting to be wrong they commit to waiting it out until the market swings in their favour. With a stop loss limit set, it's probable the limit will be reached, and the trade closed out before it gets a chance to move into profit. Even worse could be removing the limit so they can wait it out longer, every second wiping more money from the account. What happens frequently is that a trader will have more wins than they do losses. The difference successful traders in Forex have in their trading style is that they'll cut their losses early in the trade. If you don't cut your losses early, losing smaller amounts, then it's highly likely that your wins will not be enough to cover your losses. When a winning trade is up by 65 points, it's of no use if your next losing trade goes south by 130 points. Wining £65 to lose £130 is never going to make you money. Placing £10 a point on such a trade could see you £650 up to then go on to lose £1'300. This is where the risk element is in Forex. The highest risk factor is the trader. If you can't take a small loss early, you're likely to take a massive beat down later. By then it's too late, and the absolute worst thing you could do is start chasing losses. The best thing you can do to avoid that from happening is to take control your losses. You are never going to win every time, but you can take precautions to limit the damage when things go wrong. Stop losses are one thing, but strategic trading can be done with risk/reward ratios. Without overcomplicating things with ratios for this strategy and the next - keep it simple. Apply that same simplicity technique to your trading. The only ratio to always remember is 1:1. All things equal, you don't lose more than you could potentially gain. To put the ratio to use, apply it to your stop loss limits. If you want a £400 profit, you'd be risking the same amount. To lower the risk, set your stop loss limit to stop the trade when it reaches your maximum limit of £200. Using that, you're trading towards a profit of £400, with the maximum loss being £200. When you're predicting a 40 point movement, and the market takes a turn of 20 points in the opposite direction, it's better to have it stop than to find out later that you were in a trade at the start of a trend that went the opposite way from where you wagered. Trends are great when they happen, and that's why you are best to cut early losses and get on the trend. Taking a small loss can sometimes lead to bigger gains. Other times, it's simply precaution against financial disaster. Manage your trading efficiently by controlling your losses and running your profits longer, and you'll be on your way to retaining the profits you do make, rather than lose your entire account balance with larger losing trades.