How to Protect Your Forex Account

 

One old bit of wisdom that applies to every investment medium is that paper gains are not real until the position is closed.  Simple common sense, also evidenced by the three little words, protects your profits.  However, as often as we hear these sage words of advice, their import does not register in our brains until the inevitable occurs and a sure winning trade suddenly reverses and leaves us looking for the exits.  This situation is generally followed by a break from a disciplined pattern of trading to succumbing to our impulses in a feeble attempt to recapture lost territory.  Two wrongs, though, do not make it right.

There is nothing more frustrating than to see an obvious winner turn into a loser.  More often than not we have forgotten to place our stops appropriately or to utilize prudent Money Management skills when we attempt to profit from a developing trend.  Markets can move quickly, especially when fundamental data releases hit the airwaves. If you have acted in a planned fashion before entering a position, you would have already made a risk/reward assessment and set a specific profit target.  As the trend unfolded and your paper gain accumulated, now is not the time to jump with glee and pat yourself on the back.

Trailing stop-loss orders were invented for just this type of situation.  Many traders never bother using them.  If they do protect their downside risk, a simple stop-loss order generally suffices, but it does not secure your gains unless you continually place new stops along the way.  A breakeven trailing stop will handle the job in a more effective way by moving with the trend and locking in profits after your preliminary target has been reached, the time to employ the trailing stop.  With this active approach, you can protect your capital, let your winners run, book your profits as you go, and then pat yourself on the back along the way if need be. Also, keep in mind that there are no guarantees that your stop-loss will get filled at the exact price that you specified.

Another typical approach used by professional traders is to use multiple lots.  You sell the first one when your target is reached and dispatch trailing stops on the remainder.  This simple money management technique allows you to book winnings as you go, but still protects your downside risk from an abrupt adverse movement in the market.

Unfortunately, the lack of a detailed trading plan, including the proper use of risk management tools and of multiple lots, exposes a trader’s weaknesses more often than not.  Impulsive trading follows, which only exacerbates an already bad situation.  Emotional control is imperative in any trading environment, but more so in  forex trading where seconds count and stress is pervasive.  Reckless trading is not the solution for recovering market losses, but it can be a recipe for disaster.

Take a timeout and return to your Forex Demo  Structure your practice sessions around placing trailing stops and using multiple lots.  Factor the two processes into your daily trading plan and learn to adeptly place the required execution orders.  Forex Brokers are there to support your needs and may offer software shortcuts to accomplish these tasks.  It is always advisable to understand every capability that your trading platform software provides and how and when to use these capabilities to advantage.

Trading forex is risky and one of the most frustrating situations in forex trading is to observe a winning trade take off, only to suddenly reverse itself and turn into a loser.  Worse yet is to react impulsively to the loss by trading recklessly.  Learn to use trailing stops or multiple trades to lock in your gains, and practice your trading plan on a demo system until it becomes habitual.  Paper gains will never pay the rent, but booking profits as you go can lead to financial success over time and block your emotions from adding unnecessary distractions along the way.
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