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How does the statement go? Fool me once shame on you, fool me twice shame on me. That idiom was written for trading. In no other discipline in life are we fooled more often than the market which can lay the best designed plans to waste in a matter of minutes. Which is why in trading guarding against loss is much more important that planning for gain.
This week was just another in a long series of examples of markets flipping sides faster than a Chicago politician. We started out the morning with EUR/USD making fresh three year highs and ended the day with the currency at session lows. Every trade that looked great in morning was looking miserable by close of New York markets.
If you were long risk you were wrong and the simplest, easiest wisest thing to do was to cut your losses and stop out. Unfortunately for traders a stop is never easy and never simple. We hate the finality of losing money so we do everything in our power to avoid the loss. One of the most common delay tactics that I hear over and over again is “ I keep a mental stop.” To which my response is always -’Really? Do you keep a mental FX account as well?” While your stop may be mental and exists only in the reality of your mind your money is very real and it will not be protected with a “mental” stop.
If having a stop is near impossible then you need to do the next best thing. You need to trade small. How small? Cash on cash or less. (That means if you have 10,000 in your account each trade must not be larger than 1 mini lot). Unfortunately in FX where 100 to 1 leverage is common, such positioning seems laughably small. But its no laughing matter. Currencies rarely move more than 10% in one direction. At cash on cash you can survive a very bad trade and still remain in the game. At even a “modest” lever factor of 10:1 you are totally wiped out.
Trading small covers up a lot of sins and allows you the luxury of time to adjust your trades, but few traders in FX even consider this tactic.
Next week I’ll discuss how small size and trade adjustment could help you turn losers into winners – UP TO A POINT. Stay tuned.