The Key to Trading Success: Limiting the Downside

Trading requires a considerable amount of perseverance and grit to overcome the statistical adversity and the obstacles.

The forex market can be a formidable opponent. Daily transactions churn out approximately $5 trillion and the forex market is regarded as the most liquid market in the world.

It appears to be a David vs. Goliath scene with under-capitalized and over-leveraged retail traders attempting to compete with the likes of global central banks, investment banks, hedge funds, market makers, and everyone in between, all of which seem to have a sizable competitive advantage.

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The statistics and odds to overcome losses and become a profitable trader are remarkably slim yet so many strive for the ability to tame this beast. Most traders experience Sisyphean-like activity where we endlessly push our equity boulder up the market summit armed with bouts of absolute determination only to watch our mental mistakes, greed, and market conditional outliers sabotage our psyche and send us back to square one with emotional and financial scars as a parting gift. Some give up, some live to fight another day.

Investors and traders love it, hate it, don’t understand it, or fall somewhere in between. How many times have we heard the saying cut your losses quickly and let your profits run? In fact, this may be the most widely used and abused cliche in the trading world, yet it rings true for so many painful experiences in this kill or be killed financial market.

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Trading requires a considerable amount of perseverance and grit to overcome the statistical adversity and the obstacles to improve one’s life and financial well-being. This, of course, with a financial instrument that handsomely rewards winners yet ruthlessly exposes strategy and psychological flaws and weaknesses. However, somehow, traders keep coming in and trying their hand in the forex battleground. So is trading really as easy as cut your losses off quickly and let your profits run? Ask any profitable trader and the answer may surprise you.

A portion of the proverb may hold true – cut your losses off quickly. The other half, let your profits run may be easier said than done as it is dependent on the trader’s ability to manage profitable moves. In my opinion, the right side of the chart may be the hardest section to predict with absolute precision. The fundamental and technical pundits battle for supremacy on what school of thought will win the trade as actual traders are in the trenches grasping at profits or getting slaughtered as the next wave unfolds – the market doesn’t care.

Traders who are positioned accordingly have the ability to manage profits, while traders who are fighting the flow are either pressing their eject buttons or experiencing margin calls. So yes, cutting your losses quickly is undoubtedly a way to survive when trades go wrong. However, letting your profits run requires a disciplined and somewhat indifference to P/L fluctuation and that is certainly an adjustment for the traders who are identifying opportunities to manage winning trades.

The forex market is a rather technically pure market with global transactions occurring around the clock. The market’s structure generates an intricate puzzle of support, resistance, trends, ranges, channels, patterns, highs and lows, and they are all interconnected and explanatory in real-time and certainly in hindsight.

If a trader ever asks WHY in the forex market, there is most likely a headline, news announcement, or technical reason for the movement – making it great for after the fact explanations, but sometimes live trading perplexes and fakes out traders with wicks and nasty unanticipated volatility. This does not mean it is unfair or impossible to the trader, it simply means managing risk and trade size is incredibly important to reduce the noise and capitalize on the actual movement or direction the market is after.

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