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Get Smaller or Get Out

Forex Trading | by Dailyfx.com | Friday, 14 May 2010 03:51 UTC
Many times I get asked by new traders how to handle a certain situation they find themselves in when trading.

These traders may have opened five or six lots in a trade and have seen the market move in their direction. But now the market starts to move sideways or even move against them and they ask for help in what to do. My first question to them is what their plan was before entering the trade. You know….before you had money on the line and you could think clearly. First of all, if you are asking somebody else what you should do, this usually means that you have lost your way. When you have lost your way, the decisions you make are based on emotions rather than solid analysis. This is what can get you into trouble almost every time.

When in this situation, there are two options….get smaller or get out.

If you don’t know whether you are bullish or bearish on your current trade, you should no longer be in that trade so you should get out. If you still want to be in the trade, but feel uncomfortable with the risk, you should get smaller. This means closing part of, but not all of your position. Naturally, if you only opened one lot, this is not an option. But if you have multiple lots open, there is no rule that states that you have to close them all out at the same time. Closing part of the position locks in some of the profit. If you move your protective stop on the remaining position up to the breakeven level, which means moving it up to your entry, you are in the enviable position of having guaranteed a profit on the trade while still being able to further profit on a continuation of the move. That is good trading.

Written by Dailyfx.com

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