The longer we can stay in trading, the better our chances to increase the profit. One of the most effective methods to do so is to prevent greater loss.

The temptation of the forex market is unmatched. Even individuals who are on the verge of bankruptcy are drawn in by the enormous potential it offers. Despite being advised against it, hundreds of thousands of investors treat trading like a lottery, putting their emergency funds into it in the hopes of making quick money.

How to prevent greater loss

As a trader, there were only a few "success rules" to follow. First, do not invest money that you can not afford to lose. It will pose a significant danger to your account and later puts your lifestyle and livelihood in jeopardy.

Second, any loss is an unavoidable expense for a forex trader. So, if you want to make more money, you must either increase the number of profitable transactions or decrease the number of losing trades. Several ways to prevent greater loss in forex trading are explained below.

 

1. Never Trade with Emergency Funds

This month, you desire a little extra cash. Perhaps you are planning a vacation for the upcoming season. Whatever the reason, you opted to put your rent, grocery money, and even emergency finances into forex trading in the hopes of getting a good return in a few days. This reason is, without a doubt, a terrible error.

Day trading has always appealed to those who are unfamiliar with the fundamentals of forex trading. Sure, people make money in the short term. They can generate significant profits in a matter of days. However, the question is if you can be one of these "people." They are not just well-informed and risk-averse, but they are also financially capable.

Medical issues, job loss, income, retirement, divorce, recession, massive inflation, and other typical occurrences require immediate funding. While some may argue that they are all stereotypes that "rarely happen," there are many strong reasons why you should never put your "emergency money" in the forex market.

If you start trading with money that you can not afford to lose, you will be under much pressure. The traders are forced to make risky decisions as a result of this mental pressure. Though the bold decision may result in huge earnings, consider the long-term implications. When retail traders get overly aggressive with their strategy, they frequently blow out their trading accounts. As a result, always trade with money that you can manage to lose.

 

2. Determine Your Risk Tolerance

The ability to bear losses when your investments underperform is known as risk tolerance. Investing without considering your risk tolerance is similar to falling to the edge of a cliff. What are you going to do if you trade on some currency that starts to fall? Fleeing from the market is not a good answer.

There are several types of risk tolerance that you need to know:

  • The conservative style: The mindset is put on capital preservation and avoiding downside risks. This guarantees smaller returns but the trades will be in the safest possible setup. With this kind of risk tolerance, the trader must accept lower returns to avoid price swings.
  • The moderate style: It is basically the middle of conservative and aggressive risk-taking.
  • The aggressive style: A trader with an aggressive risk tolerance will devote the majority of their portfolio to a riskier decision in trading. These have a better chance of yielding higher profits over time but the trades will always be at risk of greater risks.

 

3. Be Careful with Leverage

The most effective strategy to prevent more significant loss is to use a low leverage trading account. Trading with leverage is similar to leaping out of a moving vehicle. When you trade with high leverage, you are essentially leaping out of a running vehicle. But off you trade with a low leverage account, you will jump out of a stopped vehicle.

Many successful traders trade with low leverage because the risks can be reduced significantly. If you lose in a low leverage account, you can still trade more and catch better opportunities to recover the loss. Therefore, choose a trading account's leverage wisely.

 

4. Use Daily Time Frame

Trading with the trend is a very effective technique to lower your trading risk. Unfortunately, traders often lose money because they trade against the big trend. Any lower time frame is significantly less effective at establishing long-term trends than the daily time frame.

Market-moving events occur on a global scale. Some events are planned, while others, such as natural disasters, are unplanned. We may avoid much of the day-to-day volatility by sticking to a higher time frame. It performs as a natural filter in some ways.

Consider the following scenario: you take a long position on the USD/JPY from the 15-minute chart with a 10-pip stop. Then, all of a sudden, a big players' movement causes the Dollar to plummet and take out your stop-loss.

Your stop loss would most likely be at least 50 pips away from your entry position if you were trading on a daily time frame. So even if the pair temporarily surged for 10-20 pips, you would still be in the trade, and the chance of winning would still be there.

Your risk is unchanged, but your ability to tolerate volatility surges has dramatically improved. The daily time frame has this kind of influence.

It is also crucial in your success that you keep yourself organized. Create a trading journal and stick to all of the investment industry's rules. Never disobey the rules since it is one of the most efficient ways to profit even in the most challenging market conditions.

 

5. Master One Strategy

When you get into the forex market, there is so much data that you need to know. However, what you should concentrate on is determined by your goals: do you want to look smart or looking for a way to make money?

You should learn everything if you want to appear intelligent, but this will not help you gain money. Attempting to learn everything is an information overload. Why learn about thousands of different technical analysis indicators that you will never use if it takes only one or two indicators to construct a plan correctly?

Using numerous forex techniques is acceptable. Price Action, Supply and Demand, Chart Patterns, MA Crossing, Fibonacci, MACD, Bollinger Bands, and many more are great techniques and indicators to execute trading. But aiming to accomplish too much too soon may not only limit your learning; it may also lead to severe consequences like blowing your trading account.

Many traders make things too complicated. When the underlying truths about why a market moves the way it does are right in front of them, they spend their time testing expert advisors or generating indicators.

However, because their charts are cluttered with numerous indicators, it is hidden from the view. At the same time, the chart is the most crucial aspect of getting the primary information. It is also the main secret in successful trading. So, the key is to keep a simple trading strategy that works. 

The majority of successful traders use only one or two methods. A strategy is a set of circumstances that define when you will enter and exit the market. It allows them to see trading opportunities objectively without getting bothered by too many signals that may contradict each other at times.

Knowing one trading strategy you know to implement and make money with is much better than knowing many strategies you do not understand completely.

Trading is a tricky business, which is why it's better to become an expert at implementing that one method. You will grow better at implementing the plan as you practice, and hopefully, you will start to see some positive outcomes after a few months.

So pick a trading strategy that appeals to you the most and study it every day until you master it from top to bottom, front to back. Only after then you should consider adding an extra tool or indicator to your trading arsenal.

 

Conclusions

Even though losses always exist in forex trading, you can minimize the risks and increase the profit with the 5 tips above. Do not try to use emergency money, keep your risk tolerance level, keep your leverage low, use daily time frame, and master "only" one strategy that works. If you're a rookie trader and find it difficult to choose a good type of risk tolerance, it's better to play safe by keeping a conservative manner as you learn how to trade and survive in the market.