This article looks at the ways that you can limit your forex losses.
When you trade on the forex market you need to know how to limit your losses. All traders will face losses on the forex market at some point. The impact of these losses will be determined by the steps that you have taken to limit them. If you have done nothing to limit the losses that you could make then you are going to suffer very large losses. There are two points that you should look at to limit the forex losses that you could make. The first point is your maximum loss per trade and the second is your maximum loss per month.
The Forex Maximum Loss per Trade
All traders are told that they need to have a risk management plan. The one aspect of this plan that most people know about is the risk per trade level that you are going to set. The commonly used level is 2% of your trading account balance. More than this is considered to be too risky for retail trading, but lower than this is acceptable. You have to consider your risk capacity when you set the amount.
You also have to consider the impact that this risk will have on your overall trading. If you are risking 2% of your trading account and hit a losing streak of 10 losses then you will lose 20% of your trading account. This is a major hit and why many traders state that you should only risk 1% of your trading account on a single trade.
The risk per trade percentage will affect where you place the stop loss orders for your trades. All the trades that you complete need to have a stop loss order. Most traders will place the stop loss order at the point where they lose 2% of their trading account on the trade. Of course, there are some strategies that call for the stop loss to be placed at a different level.
The Maximum Risk per Month
The maximum risk per month that you have should also be considered. There are a lot of traders who place this amount at 6% of our trading account balance. The 6% will be based on the trading account balance you have at the start of the month. There are some traders who feel that 6% is a very tight limit. However, you have to consider that during the month you should be making more profits than losses.
The difficult part of having this limit for your forex trading comes when you actually hit this amount. If you have lost 6% of your trading account then you need to know what you should be doing. Technically, you should stop trading for the month once you reach this limit. This fact is why many traders feel that 6% is too tight. If you have a 2% per trade limit then you have to lose on 3 consecutive trades to reach your monthly limit.
If you reach your monthly limit then you should review why you have made such a substantial loss. You should also look at what you can do to rectify this in the future.