cutting losses

[ravenskte]

I was reading on the risk management topic and i came a cross this phrase which says you can cut your losses to a minimal once you discover that a trade has failed by closing it before hitting your stop loss. my question is how do you know that a trade has failed? Thanks.

[leoponaik]

Hello Ravenskte,

When we talk about a failing trade or a failed trade, we mean to say a trade that has gone against your predicted direction despite of it having been a good setup before you taking it and shows no signs of going your direction.

According to your trading plan, you are supposed to journal your trades which includes all trades taken whether successful or not.

Having snap shots of all trades in your records helps you to further study your failed trades and you are able to identify price behaviour during that time and take note of that.

When this happens on several occasions when holding a trade, then you can try to avoid it the next time you are holding a new trade. Instead of watching a trade take off your stop loss, you close it early hence reducing on loss (commonly known as cutting loss).

Let me give a scenario.

If i am holding a buy position, and the trade goes against my direction a few pips, then starts to form long pin bars or forms a bearish engulfing, it is a sign that price is being rejected from going higher and the engulfing signifies a strong down move ahead, so it pulls my attention to monitor that trade. In case it gives a confirmation with a next strong bearish candlestick, i close that trade and wait for another setup to appear.

The fact that forex trading is done 24/5 days a week with trillion participants, trust me there are many setups that will always show up in the market. You don’t have to cling on just one losing trade waiting for it to come back, you never know when. Or it may actually come back when you no longer have the capacity to take it.

Take records and always review your records. This helps you to make a good follow up and track your mistakes and errors. Know when to cut your losses in a trade by following your trading plan.

I hope this has been of help to you.

[ravenskte]

Alright, i guess it is all about following the rules in your trading plan.

Thanks Leo.

[Eazojanet]

Yes, to add on what Leo said,

This is possible only when you trade following your trading plan. Before you close out your trade you can try to compare it with the other trades that have failed and hit your stops. If it shows the same features then you stand a small chance for your trade to succeed. You can also tell physically with your eyes once you are in the market that for sure a trade has failed.

If i can bring in a scenario, for instance. You set your stop loss basing on the previous support or resistance. If price reacts to that level and then successfully breaks out with a strong candlestick pattern in that direction, then you stand no chance before your stop is hit. Closing that trade will not only save you sometime to prepare for new opportunities but will also reduce on your expected loss.

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