One of the most difficult positions to be in, surprisingly, is when trades are doing much better than you had planned to.
Whilst this can sound surprising or oxymoronic in the same way “Suffering From Success” does, in a business field so reliant on discipline, there are far more temptations to break your plan when successful than if you are struggling with losing trades.
Much more concerning than this is that if you are in a losing position, you have by definition far less forex funding to lose than you would if you were weathering a storm and ensuring you stay profitable or only make mild losses to keep above your projections.
Cumulatively, the most successful forex traders lose more trades than they win. However, they make so much more money from these winning trades that they can wipe out countless small losses in an instant.
This is why you cannot judge trading ability on a win-loss record; winning traders lose the least money, not the least trades. At least one infamous trader claimed to have only lost one trade but held on to other losing options and sold the second a stock made a small gain, going bankrupt in the process.
This is why some traders believe in “letting your profits run”, which is an ambitious but often quite risky practice where once an investment (ie a currency pair) reaches a target price, rather than immediately selling (typically using a stop-loss order), you reevaluate and see how far it can go.
The key to successful forex trading, in particular, is knowing when to stick to your trading plan, when to deviate in pursuit of greater gains, and when to sell in order to maintain your profit.
In this guide, we will explore some tips and advice to help you modify your mindset and change your strategy to ensure you benefit from greater success without falling into emotional or greed-based traps.
Flip Your Mindset
Most new traders develop a loss-averse mindset that actually can cause them to lose money in the long term and is the opposite of the mentality most successful traders have.
Psychologically, we are affected by losses far more than we are by equivalent gains; success never feels as good as failure feels bad.
This mindset, often reinforced across our entire lives by being punished for failures and rewarded for successes, is not only unhealthy but is counter-productive for avid traders.
Given the volatility of forex, so many trades will succeed or fail for reasons far beyond any single trader’s control, so a loss-averse mindset is irrational. Instead, the focus should be on minimising losses that can occur and maximising benefits.
This means that if you notice a currency pair losing and your analysis suggests that this is a long-term trend, it is far better to cut your losses rather than wait for a trade to rebound, not wanting to actualise the loss and make it real.
Likewise, whilst it is not a negative to be disciplined, stick to the trading plan and sell at your
target price, it is still worth evaluating a currency pair if it is still climbing to see if this is truly its limit or whether more money can be made out of it.
Check If You Hit A Homerun
The first point to check once you realise that your currency pair is rocketing beyond your projections is whether you were at any point down on your position.
In the vast majority of typical scenarios with forex, you will be down at some point even if for less than an hour, because of the volatile nature of the space, which means that if you are constantly up on your position, you are potentially in a position to make a lot of money.
This type of winning run is typically known as a “home run” although there are a lot of different names for it, but it suggests that you are in an exceptional trade and the key to maximising your account is to figure out just how high it can go.
If you have any previous trades where they also weren’t down at any point, check how far they moved and how much you benefited.
Diversify And Practice Strong Money Management
One way to encourage letting your winning trades run is to reduce the consequential effects losing would have on your account. This means that diversification is key to success.
All losing trades do have a detrimental effect on your account, but not all losses are equally devastating, and how much a trade could affect your account is ultimately under the control of a trader or trading group.
The key to money management in forex is to ensure that any loss to an account is contained because whilst losing a quarter of your account requires you to make a third of it back to end up in the same position, losing 90 per cent of your account requires you to make up 1000 per cent.
This is a figure that would be practically impossible to make back in forex, and whilst many people dream of the one big trade that will set them for life, better the farm or going all-in will typically lead to your swift and painful exit from the trading world.
When starting out, a good approach is the one proposed by Larry Hite in the book Market Wizards is to risk a percentage of your equity so small that you are indifferent to whether it works or not.
They suggest one per cent, but that might vary depending on your account given that forex typically moves in quite small increments. Regardless, the smaller your trades are relative to your account size, the more flexibility you will have, and the less you will be ruined if a trade goes the wrong way.
Learn To Cut Your Losses First
It can seem somewhat odd in an article all about how to maximise your profits to focus at all on losses, but it is important to think about the overall health of your account and how this will affect your mindset when managing successful trades.
One of the biggest reasons why people do not let profits run for as long as they should is simply because at some point the risks will loom too heavily on a person’s mind, and they will hit the ejector seat on any trade that looks to be even slightly slowing down.
By cutting your losses on unsuccessful trades as early as possible, you minimise potential drawdown and you resist the urge to chase losses or avoid letting profits reach their full potential.
In other words, minimising your losses will not only ensure a greater net profit but also encourage the mindset that makes a greater gross profit.
After all, if you do not have the pressure of getting any win in your account, you can take your time and exit at a better point, relaxed and safe in the knowledge that irrespective of the total profit, you are well ahead of your targets.
This will, in itself, create an updraft effect, as successful trades will beget other successful trades and help you to maximise your rewards, as well as insulate when the market invariably
Analyse The Wider Context Behind A Surging Gain
On 16th September 1992, the Great British Pound collapsed after a failure to keep its exchange rate to the Deutschmark above the lower limit required to keep it within the European Exchange Rate Mechanism.
Its causes were complex and its consequences are far-reaching and highly debated to this day, but anyone who had begun to short sterling believing it to be at risk before the day itself stood to gain massively.
The most notable person was George Soros, who through his Quantum group sold billions of pounds in order to short his position, making well over £1bn on this position and getting a reputation as a man who helped to break the Bank of England.
This highlights the importance of analysing your forex position and looking at why some currencies are doing so well against others. This will help signpost good points to enter and exit the market, especially for somewhat risky shorting positions.
This also does not take away from the fact that you should never enter positions so risky you cannot shoulder the losses, as Quantum Fund would find out in 1994 when they lost hundreds of
millions of pounds in one day betting against the Japanese yen.
Ride The Wave
As much as people will try to sell themselves as gurus who know how to beat the market and make huge amounts of money betting against it, the market has a tendency to ultimately correct itself.
The most famous currency short in history was largely undone by an attempt to short the yen that went very badly wrong.
As a forex trader, the best way to make money is not to beat the market but to see where it goes and get off at the right times.