October 15, 2007

How To Avoid Blowouts When Trading Forex

There are some people who say that you need to suffer a few blowouts (wiping out your trading account) before you can become successful.

I don't buy into this at all, simply because what this doesn't teach you is discipline, and if you want to become a successful forex trader, then discipline is one of the key attributes you will need.

When starting out you shouldn't just throw some money into a trading account, and say to yourself “well it's money I can afford to lose, so what the hell, let's go for it”. Instead you should protect that money as if it's your life savings and losing it all and being blown out is simply not an option.

This will teach you to be disciplined both in your mind and in your trading where you should therefore be placing stop losses with every single trade to protect your capital in case you do incur any losses.

The key to becoming a successful profitable trader is to keep your losses small and contained and let your winners run, so your trading pot grows over time.

Unfortunately this is a lesson that even seemingly successful traders fail to learn. They may have built up large profits over a number of years, but if they don't use stop losses then eventually they can potentially be wiped out.

Indeed I know several traders who have sadly suffered this fate (mainly due to their ego and overconfidence) so please don't let this happen to you. Accepting a small loss when your stop loss is triggered is easy to swallow, but suffering a blowout and being completely wiped out due to not having controlled stop losses in place is not.

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