How to Reduce Forex Trading Losses (Apart From Using a Stop Loss)

prevent forex trading losses

Happy Friday!

This week’s question comes from Mimi, who asks:

Hi Justin, would appreciate your thoughts on how a trader can make up or prevent losses apart from using a stop loss. Often a trader may be unclear about the direction of a trade even though they may have a bias. How do we handle this as traders?

Most losses in the Forex market are the result of flawed preparation. And in every case, the loss can be prevented by doing nothing.

Of course, to make money, you have to do “something.”

But most of the losses you take each month can, in fact, be prevented. Today I’m going to share with you five ways you can reduce the number of losing trades you’re currently experiencing.

By doing this, you will improve your bottom line and be one step closer to enjoying consistent profits.

Increase Revenue or Decrease Expenses - Which is Easier?

Having traded since 2002 I can tell you that it’s far easier to decrease your expenses (trading losses). By doing this, you will effectively increase your end of month profit.

After all, profit is nothing more than revenue minus expenses. Or in our case, winning trades minus losing trades.

The longer you can stay in the game, the greater chance you have of becoming successful. And one of the best ways to do that is to reduce losses.

It’s the same with any business. If you want to achieve greater profits, you have two options:

  1. Increase revenue
  2. Decrease expenses

For the Forex trader, any loss is a business expense. So if you want to make more money, you either need to have more winning trades or reduce your losing ones.

Today we’re going to focus on the latter. Let’s begin.

1. Trade Less

How many trades do you take each month?

Regardless of the number, you’re probably overtrading. Unless, of course, you’re an experienced trader and manage to profit consistently.

But even then, it’s still possible – even likely – that you’re taking too many trades.

One thing I tell my members quite often is that it only takes one good setup each month to make a considerable amount of money.

To most, that’s hard to believe. It may even sound ridiculous, especially if you come from something like the 5-minute chart.

But it’s 100% accurate.

For me, a “good” trade is one where I can make at least a 3R profit. That’s my bare minimum to open a position.

At 3R, that one trade could be worth as much as 6% profit if I’m risking 2% of my account balance. Even at a 1% risk, it’s still 3% profit.

What about accounting for the losers, you ask?

Well, that’s why this post is so relevant. If you can reduce your losing trades, a 3R win (or more) will have a much greater impact on your bottom line.

Remember, increasing your profit is all about reducing or even preventing losses.

And trading less frequently is, in my opinion, the best way to make your winning trades more valuable.

2. Use the Daily Time Frame

This one goes hand in hand with trading less. If you stick to the daily time frame, you will be forced to trade less frequently as there are fewer quality opportunities.

But make no mistake, trading less often does not mean less profit. Just the opposite is true.

Here are four reasons why the daily time frame is my favorite:

It slows you down, allowing you to think through your decisions

Trading is like chess; it requires a lot of thought and strategy from beginning to end.

Just as there’s no way to fast track success, there’s also no way to rush into positions and have a realistic expectation that things will go your way.

The daily chart gives you the necessary time to analyze the market, develop a plan and execute it without feeling rushed.

Greater liquidity means better quality

I’ve mentioned elsewhere on this site the idea that technical analysis works best in highly liquid markets. All one needs to do is compare a blue chip stock to a penny stock, and you’ll see the difference immediately.

This is also why the major currency pairs tend to perform better than some others.

Imagine this scenario for a moment. Each candle on your chart represents a separate market filled with buyers and sellers all fighting for a desired price point.

Now, which candle, or market, has the greater liquidity – a 5-minute candle or a daily candle?

The answer is clear. A daily candle has far more activity throughout the day and thus tends to perform better when it comes to technical analysis.

The trend is your…ATM

The trend is your friend, right? I’m sure you’ve heard this saying before, and I agree with it 100%.

But really, the trend is your ATM, or automated teller machine (A.K.A. cash machine).

That may sound bombastic, but it’s true. Big money isn’t made in a sideways market. It’s made during a trending market.

That much has always been true.

And once you learn how to pyramid into a winning idea, the opportunities for big wins are endless.

The daily time frame is far better at producing sustainable trends than any lower time frame. There’s no substitute.

Filters out the noise

A global market like currencies has no shortage of market-moving events. Some are scheduled occurrences while others, such as natural disasters, are spontaneous.

By sticking to a higher time frame such as the daily, you can avoid much of the day-to-day volatility. In a way, it acts as a natural filter.

For example, let’s assume for a moment that you’ve shorted the EURUSD on the 5-minute chart with a 15 pip stop.

All of a sudden, a Fed member gives an impromptu speech causing the US dollar to plummet. The EURUSD rallies 25 pips, taking you out for a loss.

If you had been trading from the daily time frame, your stop loss would likely be at least 50 pips away from your entry. So in the event the pair temporarily spiked 25 pips, you’d still be in the trade and the prospect of a win would still be alive and well.

Your risk remains the same, but your ability to withstand spikes in volatility has increased significantly. That’s the power of the daily time frame.

This leads us right into the next topic of dealing with outside forces.

3. Always Consider Outside Forces

Bill Lipschutz is a Forex trading legend, no question about it. He’s one of the traders I look up to and someone I’ve studied for several years now.

One thing he preaches is to always consider outside forces.

Consider factors that will affect market participants’ perceptions even if you don’t believe in it.

As a technical trader, I rely on key levels to make my decisions. Whether it’s a simple horizontal support or resistance or the neckline of a head and shoulders pattern, everything I do depends on specific levels in the market.

However, I’m also always aware of what’s happening outside of the technical world.

Don’t get me wrong. I never try to figure out what the Fed might do or formulate a trade idea based on non-farm payroll or any other market-moving event.

To be succinct – I never trade the news.

Those who do attempt to front-run these events are, in my opinion, gambling their money away.

With that said, I’m always aware of what news is coming out and when as well as its potential impact on the market. I take care to consider these things and incorporate them into my technical approach.

As long as you stay aware of what’s coming up on the calendar as well as key levels on the chart, you’re in a much better position to reduce trading losses.

4. Master One Trading Strategy at a Time

It’s perfectly reasonable to use multiple Forex trading strategies. For example, I trade pin bars and engulfing candles as well as patterns such as the head and shoulders and bull and bear flags, just to name a few.

Each one is considered a separate strategy. My criteria for a pin bar is, of course, different from that of an engulfing candle.

Similarly, the head and shoulders pattern is vastly different from a bull or bear flag. One is a reversal pattern while the other signals a continuation of the prevailing trend.

But although I utilize all of these strategies, this wasn’t always the case.

If I were just starting out with price action and trying to learn these various ways of trading along with all of the rules involved, I’d go mad. Not only that but I wouldn’t be very good at my job.

I’d be a jack of all trades, master of none.

In case you aren’t familiar with this saying, it means I’d be competent with many skills, but no particular one.

That’s the worst place to be as a trader. If you want to find success in this business, you need to master one strategy at a time.

Trying to do too much too soon will not only slow the learning process, but it could also lead to some disastrous outcomes, such as blowing a trading account.

So choose one strategy that resonates with you and study it every day until you’ve mastered it inside and out, front and back. Only then should you look to add more tools to your trading arsenal.

5. Keep It Simple

I’ve clearly saved the best for last.

Like all of the posts on this site, this one is packed with information from top to bottom. It can be all too easy to finish reading it and suddenly feel overwhelmed.

Where do you go from here? What should you work on first?

But here’s the thing…

Trading with price action the way we do is simple – really simple.

Don’t get me wrong; it’s never easy. But there’s nothing complicated about it. Sure, some of it may seem foreign right now, but that’s true with any new subject.

There’s this idea in the trading industry that one needs a complex set of indicators or some secret algorithm to win consistently.

That couldn’t be further from the truth.

The “secret,” if you want to call it that, is to simplify the entire trading process.

Too many traders overcomplicate things. They spend their time testing expert advisors or creating indicators when the real truths about why a market moves the way it does are right in front of them.

But it’s hidden from plain sight due to the nine indicators cluttering up their charts.

So the real secret here is the raw price action that’s present on every chart.

I’ve been there. I know what it’s like to have so many indicators on a chart that the candles almost become dots.

As soon as I went back to the basics and learned what the price was telling me, everything started falling into place. I ditched the indicators and forgot everything I thought I knew about what it is to be a trader.

That’s when I had my “aha” moment – when I simplified every aspect of my trading.

I bet the same will happen for you.

Final Words

I hope you found today’s Q&A helpful. The length of the post got away from me, but I love writing about these topics because many of them are such a contrast to popular belief.

But that’s what makes them so useful.

I shared the following with my members recently, and I want to share it with you now. Only this time I’ve added a bit of a twist to fit this post.

Think of it like this. Most traders…

  • Overtrade
  • Use the lower time frames
  • Attempt to trade the news
  • Try to learn too much too soon
  • Overcomplicate the trading process
  • Lose money consistently

I think we can all agree on the points above, especially the last one. This leads us to one very eye-opening and somewhat obvious conclusion.

At some point, you have to be willing to do what others won’t. Doing the same thing that everyone else does – or perhaps that you’ve done in the past – won’t get you to where you want to be.

It isn’t easy, I know. But nothing worth doing ever is.

Your Turn: Ask Justin Anything

I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.

To do that, I need your help.

Here’s what you can do to get involved and have your question answered in next week’s post:

  1. Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
  2. Help me answer questions. If I missed something or if you have something to add, don’t hesitate to leave a comment below.

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