When you trade forex live you will encounter losses, but it is possible to limit the impact of the losses. There are certain tips you should heed to limit these losses. The best move is to have a solid profit and loss plan.
Profit and Loss Plan
The first question you should be asking is what a forex live profit and loss plan is. This plan is actually something that a lot of traders overlook thinking that risk management is enough. While risk management is often enough for most traders those looking to make a career out of trading should consider this type of plan as well.
Your profit and loss plan should not only help you limit the losses you actually make, but identify why you are making the losses at all. The plan helps you recognise all the weak points in your trading and helps you learn from these mistakes.
Creating Your Forex Live Plan
You profit and loss plan should be created around the same time as your risk management plan. The reason for this is that both these plans look at limiting the risks and losses that you face when trading forex live. The first step in creating your plan is to determine what profits and losses you would like to make.
When you look at the profits you want to make you need to be realistic. You also need to be quite precise as this is the only way you get the benefit of the plan. You should also be realistic and precise when you think about the losses you are willing to make. Many expert traders state that your total losses for a single month should not exceed 6% of your trading account.
You should take your risk tolerance into account with this plan. This is why you need to have your risk management plan in place when you create this plan. The risk tolerance you have relates to the amount you are willing to risk per trade, your personality and the trading strategy you are using. Certain strategies require greater risk tolerance than others.
Activating your Plan
Having the profit and loss plan is very important, but the way you use the plan is more important. If you do not stick to your plan, you will not be limiting the losses you face when trading. This plan will have to close positions when they fall to a certain loss and when you make a certain amount of profit. You have to be disciplined in your execution of this plan because you could become emotional when your trades are threatened.
When your trade is making a profit you may not want to close the position because you feel you could make more money. However, when you do this you are giving in to greed and this is emotional trading. A lot of traders who disregard their take-profit points find that they lose profits because the trade turns against them. The use of a trailing stop limits the amount you lose, but the fact remains that you will lose some of your profits.