How To Handle A Loss On The Foreign Exchange Market
When a trader enters the foreign exchange market, they expect to make a profit. What more of the optimistic traders do not realise is that the presence of trading losses is an inevitable fact. It is not something only novice traders face, but an occurrence all traders’ experience. In order to continue in the forex industry you must understand how to handle these losses, both physically and psychologically. One of the biggest mistakes amateur traders make is not completing loss management steps, which can have detrimental effects.
Why traders lose on the foreign exchange market
There are various reasons as to why one may experience a trading loss. A common reason involves an error in the trader’s technical analysis of the market. It is possible they may have made a faulty speculation. This means he believed it would move in one direction and it ultimately went the other way.
However, loss is not always based on faulty analysis. There are instances when there is an unexpected change in the forex market which affects the trade. This is unforeseeable and disregards even the strongest trading strategy.
Although trading losses are certain, one can limit their effect through planning and taking management steps after the event has occurred.
Taking a day off
When traders suffer a loss they often feel deflated and impotent. It is advisable for them to take a detox day in order to rejuvenate and regain the lost self-esteem. However, the detox day does not necessarily mean one day. The length of time a trader chooses to remain away depends on the severity of the loss and their state of frailty at that moment. The general rule is the larger the loss, the longer the detox.
In order to regain your strength there are certain behaviours from which one must abstain. One of these is engaging in any forex related activities. The detox period is a period whereby you are removing yourself from the foreign exchange market and by immersing yourself in any aspects of the forex industry will only delay your recovery. Furthermore, you should not be analysing the loss you experienced. By examining the loss and attempting to discover your error you are reliving your trauma making a rejuvenation difficult to attain.
Learning from your loss
Upon return from the detox period you should exhibit a relaxed, calm and revitalised demeanour. This is the period when you will be able to examine the loss and analyse where your trading mistake lay. If the loss was due to a sudden swing in the market you should examine what caused this. Was this change in the market really unforeseeable or were there indicators? Also, what can you do to ensure you will identify these indicators in the future?
If the loss occurred because of a fault in your trading strategy, you should explore how this happened. Once this error is discovered you can adjust your strategy ensuring this loss will not appear again.