For the majority of people who are tempted to try forex trading, the main motivation is to make a profit. But pretty quickly, they realize that dealing with losses are also part of this business. So what kinds of precautions can traders take to minimize account drawdowns when your trades go against you?
Because currency markets are inherently volatile, there are times when a paper profit can quickly turn into a real loss. That's just the nature of trading. Forex trading usually works in cycles, which means there are ups and there are downs. The big question you need to to answer is this - how much can I expect to lose if this trade goes against me?
The answer you give forms a core part of your trading system, and it focuses on how much of a drawdown you are going to be able to live with. Just so we're clear, a drawdown is the total of the capital loss in your account after you've had a series of losing trades.
For example, let's say you have made trading profits for a prolonged period of time, but your winning streak comes to an end and you have started making losses. You will obviously be concerned about how many more losing trades you will have, and how much of a drawdown you are going to have based on past experience with your trading system.
Here's How To Minimize Account Drawdowns When You Are Trading Forex...
This is why you MUST back test your system carefully before ever considering using it on a live trading account. You should always trade using a demo account with the broker of your choice until you are sure the system you are using works in all kinds of markets.
You must prove the system works through risk-free testing so you'll have enough confidence to take the trades as they are signaled. You can't be a profitable trader if you freeze every time you get a trade signal because you don't have confidence in your trading system.
Forex trading involves risks - they are always present regardless of what trading strategy you decide to use. And when there are risks, there are going to be losses. Professional traders know that losses are unavoidable, but they can be mitigated. This is the reason back testing your system is so important.
Trading can be very rewarding and exciting, or it can be frustrating and extremely expensive. Some days you experience all of these things things within just a few hours. But if you can build a forex trading system you trust through back-testing, and you force yourself follow each trade signal you receive, you're well on your way to having profitable career trading the forex market.
Because currency markets are inherently volatile, there are times when a paper profit can quickly turn into a real loss. That's just the nature of trading. Forex trading usually works in cycles, which means there are ups and there are downs. The big question you need to to answer is this - how much can I expect to lose if this trade goes against me?
The answer you give forms a core part of your trading system, and it focuses on how much of a drawdown you are going to be able to live with. Just so we're clear, a drawdown is the total of the capital loss in your account after you've had a series of losing trades.
For example, let's say you have made trading profits for a prolonged period of time, but your winning streak comes to an end and you have started making losses. You will obviously be concerned about how many more losing trades you will have, and how much of a drawdown you are going to have based on past experience with your trading system.
Here's How To Minimize Account Drawdowns When You Are Trading Forex...
This is why you MUST back test your system carefully before ever considering using it on a live trading account. You should always trade using a demo account with the broker of your choice until you are sure the system you are using works in all kinds of markets.
You must prove the system works through risk-free testing so you'll have enough confidence to take the trades as they are signaled. You can't be a profitable trader if you freeze every time you get a trade signal because you don't have confidence in your trading system.
Forex trading involves risks - they are always present regardless of what trading strategy you decide to use. And when there are risks, there are going to be losses. Professional traders know that losses are unavoidable, but they can be mitigated. This is the reason back testing your system is so important.
Trading can be very rewarding and exciting, or it can be frustrating and extremely expensive. Some days you experience all of these things things within just a few hours. But if you can build a forex trading system you trust through back-testing, and you force yourself follow each trade signal you receive, you're well on your way to having profitable career trading the forex market.
About the Author:
It's true that currency traders have to carefully manage risk, and some of that can be handled by choosing the right forex broker.