Everyone who actively trades forex has suffered the occasional loss; it goes with the territory.  Even the singular instance of loss can be pretty scary, and you may come away from it thinking, “Whew!  That could have been a lot worse!”  But nothing is more frightening – a forex horror, if you will – of a run of losses.  Even as your trading account balance dwindles you feel in your heart (and history is on your side, by the way) that you should wait it out because the market will eventually turn in your favor.  But how can you stand the pressure? When do you give in and minimize your losses?  If you’ve been trading for a while, you’ve no doubt got your own forex horror story to regale your friends with.

A “Hypothetical” Forex Horror Story

The recently struggling Euro is the focus for our hypothetical forex horror story/example of what not to do.  Let’s say your trading account balance is $50,000, and you’ve been following the analysis of what is going on the Euro-zone.  You know that several Euro-zone members have been having serious fiscal and budgetary problems; credit ratings are dropping, austerity measures are being considered, etc., etc.  From your own research, coupled with expert analysis, you’ve determined that the Euro will continue its freefall.  You take the plunge, and use $20,000 of your trading funds to sell the EUR/USD cross at 1.2400; for simplicity, let’s assume you’re risking $20 a pip.

So, here you are invested for $20,000 and the price drops to 1.1900.  Hey, you’ve just made yourself a cool profit of $10,000 on 500 pips!  But wait!  Don’t pop the champagne just yet.  The forex market has the unfortunate habit of forcing you to make often hasty (i.e. poor) decisions that render that successful trade null and void. 

Continuing on with the hypothetical forex horror story… You’ve got your $10,000 profit and the champagne glass is at the ready, and then the Euro starts rallying.  Strongly.  You’re thinking (hoping) that it’s a temporary correction.  You still have faith that the bear trend will resume.  At this point, you could still get out; you’d still have some profit, after all.  But do you get out?  No, you don’t.  You’re so sure of yourself and your analysis that you call it a night and hit the mattress.  Next morning, before even that first cup of coffee, you check your forex trading account.  Oh my.  Overnight the Euro climbed – boy, did it ever! – up to 1.2600.  Not only have you erased your $10,000 profit but, if you quit right now, you’ve suffered a pretty significant loss.

What to do, what not to do? 

Certainly, the trader in our hypothetical forex horror story example should not have been trading with so large an amount relative to his account balance – 40% is well beyond risky (bordering on insanity).  And perhaps he should have considered, given that large investment, hedging his trade.  Hedging is a concept used by many successful traders, because it can protect you from unexpected movements in prices that have the potential to knock out a recently opened position.  For example, in tandem with the EUR/USD trade he could have sold USD/YEN, as well, that way he is better protecting his position.  Granted, the hedging technique isn’t going to help you make huge profits, however, it will help you avoid writing your own forex horror story.

Hindsight is 20-20

You know what you should have done.  What’s important now is to recognize the trading mistakes that led you to that conclusion in our hypothetical forex horror story.   It’s all about minimizing your risk, reducing your exposure, utilizing less leverage, planning and executing appropriate risk management strategies, hedging your trade, etc. 
 

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