Taking Early Losses

Filed under: Learn Forex Trading |

Screen shot 2013-06-13 at 10.12.38You will very often hear forex traders talking about taking partial profits, or taking profits before their intended target based upon what price action is telling them. But you do not very often hear (if ever!) traders talking about taking early losses. It seems that, if a trade is in profit, then it is okay to take those profits at any time… but oddly, if a trade is making a loss, that trade will be held onto until the stop loss has been hit – no matter what! However, by taking early losses, your bottom line profit/loss figures could be significantly improved.

 

Let’s say for example that you take a long trade and set a stop loss below the low of the most recent candle. The market has been making higher lows for the past ten days, despite a number of bearish candles. This tells you that the bullish momentum is very strong. However, after you enter the trade, despite moving into profits on the first day with a candle that has another higher low, the following day, the market moves against you and takes out your stop loss. So what could you have done to mitigate the damage on this trade?

 

The obvious thing would have been to move your stop loss up after the first day when the market made a higher low. You could have moved your stop loss to just a few pips below the low of the closed candle, and when the market moved against you, this new stop loss would have been hit for a loss that was not quite as much as the original stop loss. When higher lows are continually made like this in a bull trend, it is a good idea to move your stop loss up to below the low of the latest candle. Although this cannot be seen as profit taking if it is not above your entry, it could be seen as damage limitation – and this might be just as important to your long-term profit levels.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>