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Cutting Gains Short
By Tom Long | July 9, 2007
If there’s anything that we keep repeating in the course it is to cut your losses short and let your gains run. Unfortunately it seems like regardless how often we say this and regardless the urgency we use, we see our students do the exact opposite. Positions going against them are held on to as if they were a life support machine and positions going in their favor is cut as soon as the trade is up 50 pips.
I cannot stress enough that you have to do the opposite no matter how hard it is. I know for sure how difficult it can be to accept a loss and close a losing trade. I also know how easy it is to add on to the position to get a better average price. Studies have shown that humans are prone to take a gamble on prices coming back instead of cutting your loss and walking away and this certainly seems evident in the FX market. Averaging in is never and will never be a good idea.
Instead be religious about setting your stops at the same time as you open your trade and never ever move it (unless you’re trailing it as your trade goes in your favor) and never add to a losing position. Also stay away from cutting your gains short. It doesn’t hurt to have an open position and unless your opportunity cost for used margin outweighs the potential of the trade you’re in, you should not touch that trade. Currencies move in long trends and you will beat yourself up for cutting your gains short only to open another trade, pay another spread and you don’t even know if this new trade will even begin moving in your direction. And in the meantime the winning trade you just closed, just keeps trending…
Tags: dollar, forex, forex news, forex trading
Topics: Don't Trade Like This |