This article looks at the ways that you can control your foreign exchange rate losses.
There is only one thing on the forex market that is certain and this is the fact that you will make a loss at some point. The loss that you make can be large or small depending on the steps you have taken to control your foreign exchange rate trading losses. If you are not controlling your losses then you are going to face account depletion on the market. There are a number of ways that you can control your foreign exchange rate losses. You should look at the use of the profit and loss plan, risk management and money management.
The Use of a Profit and Loss Plan
There are a number of aspects that you have to look at when you create a profit and loss plan. The profit and loss plan needs to detail the ratio you are going to work with and the profits or losses you are willing to make. When you detail all of this you will be able to control what you do on the market and how much you lose.
The ratio that you are going to use will be the profit and loss ratio. This will detail the number of profitable trades you should have against the number of losing trades that you should have. Most traders will place this ratio at 2:1 which means that for every two winning trades you will have one losing trade. There are some traders who set this at 3:1 or higher, but you have to consider whether or not this is reasonable.
The profits and losses that you will make should also be detailed. When you detail the losses that you are willing to accept you can working toward making this a reality with the other trading plans that you have.
The Foreign Exchange Rate Risk Management
The risk management plan will actually help you with the active steps of controlling your losses. One of the aspects that you need to detail in the risk management plan is the placement of stop loss orders. You also have to state what your maximum loss per trade is going to be. This should be linked to the amounts that you have set out in your profit and loss plan.
The employment of stop loss orders are the best way to control the losses that you make. As these orders will close the trade once a certain loss level has been reached you can limit the losses. This is often combined with the risk per trade that you are willing to take. When you combine these two points you will be able to determine where to place the stop loss order for maximum protection.
The Money Management Plan
There are a lot of traders who know about the money management plan, but they do not use it. You have to create a money management plan not only to limit the losses that you face. When you look at loss control you should consider the maximum loss per month. This will be part of your money management plan and will detail the amount of your trading account that you are willing to lose each month.
Get a free Forex PDF PLUS:
- 14 Video Lessons
- Free One-on-One Training
- A 5000$ Training Account
- In-House Daily Analysis
- Get FULL ACCESS