To be a good trader you need to be able to manage risk. Managing losing trades is just as important as managing winning ones and the key is controlling our emotions.
Trading Forex is like playing a game of chess. There are two players, buyers and sellers but there’s never a stalemate, we always have one winner. The winner is the one who outsmarts the other. It doesn’t matter if you are a big fish like an international bank or just a humble retail trader. The game is the same, the rules are the same, but the stakes obviously vary. Big or small, we can still play together, the board is always the same, and we have access to all the same pieces. But how we use our arsenal of trading techniques is what sets traders apart.
Just like in chess, we try to anticipate how the market will move next. We are not always right. But we always have pieces to play. Each move we make changes the path of the game. Every market move changes the way we move.
A good chess player looks several moves ahead, always with an end move in mind. To the unknowing, some moves might even look random or odd. It can take many moves before the game becomes clear. The player might not even know which outcome will win. But positioning pieces is the way to win.
Sometimes we need to cut our losses and close red trades, just like chess when we sacrifice one piece for another.
In chess we can protect our pieces in a strategic fashion. When we trade we use stop losses in the same way as we weigh up the worth of holding a position or allowing it to be taken by a stop loss. We can move a chess piece out of harm until another attack, and when trading we can move our stop loss or use other moves like a hedge protection trade.
When you move a valuable chess piece like your Queen, you must cover and protect her. She is valuable. The higher value trades will need bigger stop losses. You would not sacrifice her for a pawn, so look at your likely return before you make a trade. Is it worth the risk to potential return.
Just a few thoughts before we continue….