Many are attracted by the sirens of some advertising campaigns, which portray Forex Trading as a kind of toyland, where profits are always and in any case guaranteed to everyone. Nothing could be further from the truth, as every trader has experienced firsthand. Losing trades are a constant reality, the uninvited guest of the investment activity. It's impossible to eliminate them from a trader's life, there's no doubt about that. However, there is also no doubt about the possibility of limiting the effects of trades that have "gone bad". In simple terms, it is possible to control forex trading losses to enjoy profits in subsequent trades. For a closer look at this stage of a trader's growth, see a novice trader should handle losses.
The Problem With Manual Exits
Of course, you can always exit a trade that is causing significant losses. However, those who do it "manually", that is, those who simply close the position when they believe the situation has become unrecoverable, don't go very far. The risk, if everything is left to improvisation and the emotion of the moment, is closing the position too early, when maybe it could turn positive in a short time, or too late, when the damage has already been done.
Why Objective Rules Work Better Than Improvisation
So, what to do? Simple, delegate the limitation of losses to operational techniques that leave little room for the trader's discretion, governed by principles that are as objective as possible or, if possible, statistically valid. In short, use stop losses.
What a Stop Loss Actually Does
A stop loss is defined as the price level reached at which the position is automatically closed as the asset struggles to recover. If the price drops and touches this threshold, it is evident that the trade can only generate losses, so it must be closed.
The key point, for those who want to control losses, is to define the price corresponding to the stop loss. Technical analysis and money management brilliantly solve the issue. In fact, they allow you to identify the support, which is precisely the price level at which the negative trend is confirmed without ifs and buts. For practical timing cues, see 5 timely moves to stop losses.
How Is Support Traced?
Most platforms offer tools capable of calculating the support exactly. Incidentally, the calculations are complex and involve the lows reached in the reference period. The only element that can cause some concern is precisely the choice of the reference period, which is up to the trader. This should be long-term if volatility is high, medium and short-term if volatility is low.
