What is the most gut wrenching feeling you can have as a Forex trader?
Missing a profitable setup is certainly one of them. But losing money on a once profitable trade is, in my opinion, the worst of the worst.
You see your open profit climb with each passing hour and everything seems to be falling into place. It’s only a matter of time before the market hits your target and those 150 pips magically transform into cash.
But what happens when the market has other plans?
Instead of dishing out 150 pips worth of profit, you’re stuck with a 50 pip loss. What’s worse is the market had already moved 100 pips in your favor before reversing without warning.
It’s happened to all of us. And the feeling that follows sucks.
While I can’t say that feeling disappears with experience, I can say there are ways to prevent it from happening again in the future.
In today’s post, we’re going to take a look at five ways to stop losing on winning trades.
Some of these are proactive measures while others are more reactive, but they’re all designed to help you protect your capital and lock in more profit during a trade.
1. Know Your Levels
There’s no better use of your time than learning how to identify support and resistance levels correctly. So if you have limited time to study, put this one at the top of your priority list.
Here’s how I like to think of key levels in the market…
Do you remember the study guides your professors used to hand out before a test?
These guides gave you a general idea of the topics that would be on the test. With this in hand, you could hone in on the relevant topics while studying.
You became more efficient during your study time.
The same concept applies to key support and resistance in the Forex market. These levels, whether horizontal or diagonal, offer you a way to prioritize your efforts and only focus on the most significant areas.
Otherwise, you’re left wandering about in a sea of candlesticks not knowing where to begin.
That’s a lonely and frustrating place to be – I know.
Once you have these levels drawn, you can begin watching for buying and selling opportunities.
It’s as simple as that.
The problem is that people love to overcomplicate things. Even if a trader has wiped their charts clean of all indicators, it’s all too easy to fall back into old habits.
Adding the MACD back into the mix seems harmless enough. But before you know it they’ve got a MACD, Stochastics, RSI and five moving averages on each chart.
By this point, they’re right back to where they started and once again unable to see the price action on their charts.
Okay, so how do you go about finding the critical areas?
I’ve written about the topic before so I won’t go into too much detail here. But I will share with you a few key points to keep in mind while performing the exercise.
- Stick to the daily and weekly timeframes
- Focus on the major swing highs and lows
- Concentrate on finding major turning points first
- Become proficient with horizontals first, add trend lines later
After several years of coaching and over a decade of trading, I’ve found that most traders draw too many levels. By the time they finish, there’s hardly enough room for a single candle to fit between them much less a favorable setup.
So be sure to keep it simple. Focus on the major swing highs and lows on the daily or weekly time frames.
And if you’re just getting started, it may be best to master horizontal levels first and add trend lines later. That way you don’t feel overwhelmed while learning the ropes.
Being able to identify key support and resistance with precision is a never ending process. How good you eventually become at this skill will be measured by what you do today.
2. Be Mindful of Outside Forces
I’m a technical trader to the core. I don’t use fundamentals to make trading decisions in any way shape or form.
However, I’m always aware of what’s happening from one week to the next. I also consider the impact a particular event could have on the market.
An excellent example is the non-farm payroll report. We know the event affects the U.S. dollar and that it’s also one of the more impactful occurrences near the beginning of each month.
With this in mind, trading the U.S. dollar around this time can be a risky endeavor. The same notion applies to any currency and its respective news events.
Now, here’s where many traders get tripped up…
While I won’t enter a new position ahead of a major news event, I may stick with an existing position. But it all depends on the situation.
For example, let’s say I have an existing EURUSD short position that is more than 200 pips in the money. On top of that, the pair has closed below a significant level on the daily time frame.
If I were then faced with a non-farm payroll report, I might decide to hold through the volatility.
To account for an adverse reaction to the report, I’d trail my stop loss. That way, I’m locking in some profit in case there’s a surprise in the number.
On the other hand, if that same short position were only 50 pips in the money ahead of non-farm payroll, I’d likely close the trade before the release. In this case, there simply isn’t enough of a buffer for me to feel comfortable holding through such a volatile event.
At the end of the day, it comes down to how risk-averse you are.
I know of some traders who exit before major news regardless of where the market is trading. So it’s all about finding an approach that works best for you.
I’ve found that as long as I get the levels right, I’m better off relying on the price action in front of me.
3. Trail Your Stop Loss, but Not Too Soon
I know what you’re probably thinking – the idea of trailing a stop loss is hardly groundbreaking advice. But there’s a reason why this topic is one of the more heavily debated in the world of Forex trading.
Move your order too soon, and you run the risk of getting stopped out prematurely.
Move it too late, and you could watch a once profitable trade turn sour.
There’s nothing worse than getting taken out for a 50 pip gain or worse, breakeven only to watch the market run for another 300 pips in your intended direction.
How many times has that happened to you?
Ask me the same question, and I’ll need more than two hands to count.
It’s arguably more painful than missing a quality setup entirely. You had the right idea, your entry was spot on and then bam, just like that you’re kicked out.
What’s worse is that you get to watch the market tick away without you.
So how can you avoid getting taken out prematurely without giving up too much unrealized profit?
It boils down to two key factors:
- Know your levels (and the effect they have on your position)
- Utilize the daily time frame
Combining these two things will help you lock in more profit without being taken out of the trade prematurely.
All too often I see traders enter on the daily chart and then trail their stop on the 1-hour chart.
This is a mistake, particularly if you’re new to trailing stop losses.
It may work for a while, but chances are your trailed stop will do you more harm than good. All it takes is a sudden spike on the 1-hour chart to trigger your stop loss. The next thing you know you’re watching the market continue the rest of the way without you.
If you enter on the daily time frame, stick to the daily time frame when trailing your stop.
Anything lower and you run the risk of using highs and lows that are inconsequential in the grand scheme of things.
4. Don't Get Greedy
When you’re in a winning trade, you feel on top of the world.
The countless hours of chart analysis and late night study sessions have finally paid off.
What an awesome feeling!
It’s at this moment that you need to practice restraint. Because without it, you may do something that will cost you that hard-earned profit.
What “something” am I referring to?
Moving your profit target.
This seemingly innocent act can cost you a lot of money. And the worst part is that it’s inherently deceptive.
You may think you’re moving the target for technical reasons. At least that’s what you keep telling yourself.
But deep down inside, your subconscious mind is the one in control. And its motive is greed, pure and simple.
So what’s the solution?
- Always set a target before you enter a position
- Never modify a target after you’ve entered a position
Now, there may be times when you should move your target closer to your entry. Perhaps there was an oversight during your initial analysis of the setup.
And that’s okay.
The greedy side of your subconscious will never tell you to take less profit, so you can rest assured you’re acting on logic and not emotions.
On the flip side, moving a profit target further away from an entry is almost always driven by greed.
The decision may have some technical merit, but it usually isn’t enough to effect a desirable outcome.
Your first instinct is usually right, so why fight it?
5. Always Have a Plan
This one covers the last two topics and then some. Before you enter any trade, you must first have a plan.
Otherwise, you’re like a ship without a rudder – you’ll easily get blown off course.
Now, a plan for a particular trade idea is different from your overall trading plan, so don’t get the two confused.
Think of it like this…
Your trading plan is how you intend to win the war.
Your trade plan is how you intend to win the battle.
While your overall trading plan is essential, I want to focus for a moment on the importance of having a trade (battle) plan.
When I started trading Forex in 2007, I was like most new traders. I would see something that looked pretty good and just pull the trigger.
I might have even set a target and stop loss value beforehand, but outside of that, everything was an afterthought.
However, just like in a battle, you need to consider and plan for various outcomes.
- What if the market closes above/below a particular level?
- What if the market forms a pin bar or engulfing pattern against your position?
- What news could influence your trade?
You get the idea. It’s important to evaluate all of these questions and have a plan for each one. That way if something does happen, you’ll know exactly what to do.
If you don’t have a plan and instead choose to fly by the seat of your pants, your decisions will be contaminated by emotions.
Sure, you may have a technical reason or two for doing what you did, but without a plan, there will always be some emotional attachment.
There are no emotions needed to execute a plan. The market acts, and you react according to what’s written.
The key here is to write these rules before you enter the trade. This is the only time you have a neutral bias. Because as soon as there’s capital at risk, your bias kicks in and so do the emotions to some degree.
A trade plan doesn’t need to be complex. In fact, I urge you to oversimplify it.
A few bullet points of how you intend to react to various scenarios will do. Your stop loss and target values should also be part of this plan.
The only way you’ll know if you’ve done it right is through trial and error. But even a poorly designed plan is better than no plan at all.
One of the worst feelings for any trader is that which occurs after losing on a winning trade. To know you were up by 100 pips but finished with a 50 pip loss because you were caught off guard is disheartening, to say the least.
We’ve all been there. But the five points above, if executed correctly, can reduce this dreaded occurrence in your Forex trading.
Before I enter a trade, I’ve identified my key levels, looked at the event calendar and have a written plan. This combination allows me to manage my position based on the technicals and not emotions.
Trailing your stop loss is an excellent way to lock in some profit as the market moves in your favor. However, be careful not to move it too soon. Otherwise, you could miss out on a bulk of the profits, which are essential if you want to succeed as a Forex trader.
The number one rule as a trader is to never move your target once you’ve entered the market. In some cases, it makes sense to move it closer to your entry, but you should never move it further away in hopes of greater profits.
Now It's Your Turn
How do you avoid losing money on winning trades? What is the one thing you struggle with the most from the list above?
Share your experience or ask a question below and I’ll get back to you shortly.