Reducing losses and establishing limits must be the main task that a Forex trader has to maintain. When tendencies in the Exchange Market push you into losses it is recommended that you set loss base limits to reduce them, and go through this stage in a safe manner, without going bankrupt.

When the market moves against you, minimum losses can sometimes be positive when ending that market period, also helping you stay in the market until its tendencies start benefiting you.

An easy and proven way to reduce your losses in Forex to a minimum, is establishing beforehand a maximum percentage of acceptable losses within your Forex budget, you must do this before defining your position in Forex.

The highest loss that you may have in Forex is the maximum amount that you have set aside within your budget for this, which you yourself establish in a trade or deal.

In other words, this is also known as a “Stop Loss”, meaning, stop operating and take the earnings, which is considered important, among many technical strategies to administrate money. Making good use of a money management technique will keep you ahead of many other traders who have been left out of the Forex market due to high losses. These lost all their exchange money in the market, because they did not use a technique that would protect them, allowing an efficient money management during their time in the Forex system.

minimizar-perdidas-2If a trader does not follow the rules to properly manage money while in Forex, there are possibilities of losing more money than it is allowed. For example, if a Forex trader with a total budget of $1000 makes a transaction and loses $100, this is an acceptable loss for the trader.

Then the trader continues and loses another $200 in a second transaction; this may be seen like he had some bad luck, and thinking that he may continue making new transactions, he loses for a third time $200 in a different transaction.

The trader had a total of $1000, from which he already lost $500 and now he only has $500 left, but instead of stopping and using a technique to minimize losses, the trader thinks that after losing three times there is a possibility that by luck he may win this time, and he spends $200 more in another Forex position.

After placing $200 in that last transaction his capital was reduced to $300. The probability of obtaining benefits are practically none, because if we summarize up to now he has had a loss of three quarters of his budgeted capital to operate in the exchange market, he now has to earn in the next three consecutive transactions, for which he is out because he does not have enough money. With his finances in this state even if he were to have luck with his transactions, he could not participate in the market because he does not have enough money to recuperate the losses. This situation puts him out of the market and drives him to frustration. This would not have happened if the trader had previously established a maximum amount of losses that he can take.

The reason for his failure is that the trader put a great amount of his money in danger in every operation, without thinking of using good money management techniques for the exchange market. (For example, in his first operation he lost 10% of his capital)

When you trade in all the dimensions of the Forex market, you may find good market strategies to avoid losses. In fact, this may take a trader from a position where he does not have enough capital, to a position where he is wise enough to recuperate the losses.

An important guideline to have in mind is the saying “Cut your Losses Fast”. Many traders believe that following a strategy to the “t” means Never modify your Stop Loss order, but in an unstable market like Forex you find success in Minimizing losses, BEFORE concentrating in earnings.

If the reason you entered into an operation, and somehow, no longer has logic to it, then it is not wrong to beforehand step out of your position to protect your earnings or minimize your losses.

You must not take this as not following your strategies every time. You should see the difference between not keeping your Stop Loss strategy, and being flexible and knowing when to step out of your position.

A clear example of this may be when a trader takes a position and then starts getting losses. After a while, the market gives him a “second chance” and his position returns to the entry price placing him in the breakeven point. A focused and conservative trader in preserving his capital, will close out his position in Zero earnings, but also Zero losses. On the other hand, an ambitious trader will always believe the market has turned on his favor and will not close the operation waiting to get earnings (which already has turned into losses), only to see his position turn to losses and not getting a third chance.

To sum up, always keep in mind that an important rule in money management is keeping losses to a minimum. This way, you will limit your losses and increase your earnings, retain your funds and make good transactions.

Do not expose more than a 2-5% of risk in each transaction.

It is also important to know that you will always be prone to lose, no matter how much you know about Forex or how instructed you may be, or how elaborate our strategy may look, or how much we studied an operation, it is vital to know we are not infallible, that it is always possible to make a mistake or that simply there are market movements that are out of our hands.

Lastly, do not think that Forex has anything to do with gambling, nor with trader’s luck in buying and selling currencies. The only thing that can help you be successful in Forex is being careful, use two or more signal indicators to operate, study in detail the principal variables involved in each case and develop a strategy over time, your own Forex strategy.

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