To those who cannot cut losses: Cut losses is defense. Change the meaning of "loss"
To avoid complexity, I will not factor in spreads; this is just an example of a trading rule.
Suppose you make 50 trades in a month.
Assume a profit of 20 pips and a loss of 20 pips.
The win rate is 60%.
With a 60% win rate,
30 winning trades
20 losing trades
would be the result.
Since it is 20 pips × 30 – 20 pips – 20,
it becomes +200 pips.
If you can steadily earn +200 pips,FX can be considered sufficiently successful.
If you can give a little advantage to your trading rules, FX should be able to win normally.
However,in reality, it doesn’t usually turn out that way.
Why is that?
“Not conscious of good ways to lose”
Are you aware that there is such a thing as a good way to lose, a good way to cut losses?
Some may think, “Is there good or bad in losing?”, but there certainly is a good way to lose and a bad way to lose.
What is a good way to lose?
It isproperly cutting losses according to the rules. This is extremely, very, very important. (strong emphasis)
Conversely, a bad way to lose is to break the rules (hesitating to cut losses, moving the stop, etc.).
Even if the initial plan is “1:1 risk-reward, 60% win rate,” you should still be profitable, but in practice it doesn’t often happen that way…
Why does that happen? It’s becausethe way you lose is bad.
Imagery toward “stops”
If your win rate is 60%, out of 50 trades you will lose about 20 trades.
If you think of this as“I lose 20 times”, you are more likely to have a bad way of losing.
This is because you have a negative image of cutting losses.
You have a mindset that cutting losses is not good.
With this mindset,the impact of losing is greater than the impact of winning, making it harder to lose according to the rules.
If you don’t get used to losing, you may end up in a dire situation
The worst case of a bad loss is forced liquidation, a single, massive exit from the market.
Being forced to accept a loss by the FX company leaves a very bad taste and causes huge losses.The worst way to lose.
However, people who lose money in FX usually follow this pattern: they are forced out through a margin call.Slow and large losses are also called that.
Image toward “loss”
The word “loss” itself generally carries a not-great image.
“Losing feels bad…”
“Winning is better.”
This is probably common sense.
Two types of disappointment or anger when losing in FX
In any competitive activity, like games, losing is frustrating, isn’t it?
FX is a competition too. Even in a demo, if you lose, you will feel frustration (if you are serious about it).
And when real money is involved, if you lose, your money actually decreases, which is a much stronger frustration than in a demo.
As shown above, there are two kinds of frustration or anger when you lose.
- Frustration/anger from reducing money
- Frustration/anger from going against your own market analysis
The point isthat you feel frustrated/angry not only from losing money.
For example, suppose you entered a long position.
If the market plummets the moment you enter, what happens?
You might feel, “Why did this happen right when I entered?!”
When you lose in FX,the combination of “losing money”“going against your own analysis” intensifiesthe negative emotions.
If these negative emotions accumulate, eventually your mental state may collapse.
Change the image of “loss”
To prevent that from happening, you need to change your image of losing.
What is the purpose of FX trading?
It is to increase money, right?
Increasing money, but is trading a one-time thing that ends after one trade?
If that were the case, you might have to trade with all your might, with a strong resolve to never lose, even if it hurts (though FX may still involve losses…)
However, that is not how it should be.
Many FX traders aim toincrease money overall by repeating wins and losses
If that is the case,losses in individual trades, as long as you cut losses per the rules, are not losses but a path to winnings.
Cutting losses is defense
Cutting losses is about protecting your account balance. It can be described as defense.
In games like RPGs, defending can reduce the amount of damage you take, even if you still take some.
If you view FX as a battle with a huge monster, you can aim to land big damage with a winning trade when opportunities arise, and defend to reduce damage when hit by a losing trade, and gradually you may achieve the goal of defeating it (though market is not something you defeat).
What I want to convey is: if you can accumulate winning trades, and you do not take a big loss, your balance will increase.
Mastering stops leads to becoming profitable
Accept losing as losing, gracefully, and that leads to the next step.
If you feel that losing is something to be ashamed of, the desire to avoid losing makes it hard to lose gracefully.
Losing gracefully protects your assets.
Even if you are not trading live, you can practice cutting losses. To get used to losing, use a demo account.