Here is WHY You Must Learn TRADE MANAGEMENT
Hey traders,
In this post, I will share with you my tips for trade management in Forex trading .
But first, let me elaborate on what is exactly a trade management .
Trade management is the set of rules and techniques applied for managing of an already active position.
Trade management is a very important element of any trading strategy that should never be neglected.
1. Never remove a stop loss
Being in a huge loss, many traders refuse to admit that they are wrong. Instead, watching how the price moves closer and closer to a stop loss, they remove stop loss hoping on a coming reversal.
The alternative situation may happen when the price is going sharply in the desired direction. Watching the increasing profits, traders remove a stop loss (and occasionally take profit), being afraid to miss bigger profits.
Both situations may lead to substantial, higher than initially planned losses. Driven by many factors, the market can easily burn all gains and move against the desired direction much longer than traders stay solvent.
Take a look at this long trade on Gold. When the price comes closer and closer to a stop loss, many traders can not take a psychological pressure and remove stop loss, being afraid to take the loss.
However, most of the time, stop loss will help you to limit your losses. You can see that after Gold reached stop loss, the price dropped much lower. Removing the stop loss, you would inquire bigger losses.
Never remove a stop loss. It must be always set.
2. Never modify your stop loss if a position is in loss
Watching how the price moves closer and closer to a stop loss is painful. Instead of removing stop loss, some traders move it and give the market more space for reversal.
Even though such a technique is safer than the complete stop loss removal, it is still a very bad habit.
Each stop loss adjustment increases the potential loss, not giving any guarantees that the market will reverse.
It is highly recommendable to keep your stop loss fixed and let the price hit it and admit the loss.
Above is one more example, why the earlier you close the trade in a loss, the better. Modifications and adjustment of your stop loss will most of the time lead to even bigger losses.
3. Know in advance your profit protection strategy
Where do you take your profit?
Do you have a fixed tp level or do you apply trailing stop?
You should always know the answers.
Coiling around take profit level but not being able to reach it, the price makes many traders manually close the trade or move take profit closer to current price levels.
Another common situation happens when the market so quickly reaches the desired TP level so the traders remove TP hoping to make bigger than initially planned profit.
Such emotional interventions negatively affect a long-term trading performance. TP removal may even burn all profits.
Do not let your greed intervene, and always follow your rules.
Above is the example of trade management rules in Forex trading. After GBPUSD reached a key support, a long position was opened from that. Once the price moves up by a certain distance, stop loss will be moved to entry. Take profit will be the closest key resistance.
4. Never add to a losing position
Watching how the price refuses to go in the intended direction and cutting a partial loss, many traders add to a losing trade in hopes that the market will reverse and all the losses will be recovered.
Again, such a fallacy usually leads to substantial losses.
Remember, you can add to a position only AFTER the market moved in the desired direction, not BEFORE.
Just imagine what could happen with your trading account, if you kept adding to a losing short position in a recent crazy bullish market on Gold.
5. Close the trades manually only following rules
Quite often, newbie traders manually close their trades because of some random factors:
they saw someone's opposite view, or they simply changed their mind.
Remember, that if you opened a trade following your trading plan, you should always have strict rules for a position manual close. Do not let random factors affect your trading.
Above is the example how you could easily miss a lot of pips on Gold, simply because the market temporarily stuck on some resistance.
Following these 5 simple tips, your trading will improve dramatically. Remember, that it is not enough to spot and accurate entry. Once you are in a trade, you should wisely manage that, following your plan.
