The forex market can be a formidable opponent. The daily transaction volume as of April 2019 was approximately $6.6 trillion; the forex market is regarded as the most liquid market in the world. In most respects, undercapitalized retail traders appear to be outmatched as they take on global central banks, investment banks, hedge funds, market makers, and everyone in between.
The odds against becoming a profitable forex trader are high, but many small investors still try to tame this beast. The experience can be Sisyphusean, as individual mental mistakes, greed, and market-conditional outliers send investors back to square one with emotional and financial scars as a parting gift.
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?" It may be the most abused cliché in the trading world, but it still rings true. Trading requires a considerable amount of perseverance and grit to overcome the statistically guaranteed adversity. This is especially true in the forex markets, which handsomely rewards winners while ruthlessly exposes a trader's flaws and weaknesses.
Forex for Beginners
So, is trading in forex markets as simple as cutting your losses off quickly and letting your profits run? Ask any profitable trader, and the answer may surprise you.
One portion of the proverb may hold true—cut your losses off quickly. But letting your profits run may be easier said than done, as it relies on the trader’s ability to make profitable moves in the first place. In my opinion, the right side of the chart may be the hardest section to predict with any precision. While the fundamental and technical pundits battle for supremacy on what school of thought will win the trade, while the actual traders are in the trenches grasping at profits or getting slaughtered as the next wave unfolds. Traders who are positioned correctly can manage profits, while traders who are fighting the flow are either pressing their eject buttons or experiencing margin calls. Letting your profits run requires a disciplined 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 live trading perplexes and fakes out traders with nasty unanticipated volatility. This means that managing risk and trade size is important to reduce the noise and capitalize on the actual movement or direction the market has to offer.
Limit the Downside
A solid education can provide an application-based foundation. Support and encouragement are also necessary to stay positive as a trader. I am a big believer in having a support network to tap into when you find yourself struggling. Rather than throwing everything out and starting over, traders can keep the core principles (market structure, support, resistance, trends) and surgically remove the flaws that are costly to the P/L curve. Lean on a support network of traders who are performing well and adopt some survival skills during the tough times.
It is very important to identify what is and has been repeatable in the market. There are a variety of ways to apply winning strategies and consistent trades to the market’s predictability and structure. Most successful traders are far more conscious of the downside than the upside. The upside where unexpected profits are acquired is often little more than the market being overly generous. The market is full of surprises, but unfortunately, most of those surprises are to the detriment of the trader. Consider the upside as generosity, and keep the downside in the forefront in your strategies.
The Bottom Line
The most important part is to remember to cut your losses quickly. Losing is the worst part of trading, but when the losses are manageable, small, and seemingly insignificant relative to your total equity, you’ll be fine. If you find a way to let your profits run, congratulations on doing something that most traders don’t. But most importantly, find a way to cut your losses quickly, and you have a chance to survive the chaos the market throws your way. Then, aim to take advantage when it’s behaving to your liking.