Importance of Knowing When to Quit in forex

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As much as you have probably heard how lots of folks struck it big in the currency market, you’d also positively have come across the various horror stories from those that lost a large amount of money really quickly. 

Depending on how skeptical you are , you might either take these horror stories very seriously, or not seriously enough.  Either way the fact of the matter is that many folks do finish up losing money in the foreign exchange for a very simple reason : they don’t know when to quit. 

To illustrate what we mean, let’s go over a quick example.  Say you have US$ 100,000 that you want to invest in the currency market.  That isn’t a tacky amount, and you figure that if you settle on the right investment, you might truly make a killing. 

So you glance at the market, and feel that using your US$ 100,000 to buy Aus$, which is presently being sold at 1.4244 Aus$ per US$, would be a good idea since it looks to be rather high and the Australian Dollar will probably pick up soon. 

With that, you buy into that currency, and you currently have Aus$ 142,440.  Great! 

Sadly, this is where things begin to go screwy.  Instead of the exchange rate improving, it actually does the opposite, and after twenty-four hours you find that it is now 1.4544 Aus$ per US$.  At that point, if you were to sell you’d finish up losing a ton. 

rather than selling and stopping up losing, you choose to wait and hope that it improves.  Come the following day though, you find the exchange rate has fluctuated in the wrong direction again, and is now 1.4554 Aus$ per US$. 

At this point you figure that it does not go to get much worse, and so you choose to hold for some time more.  But what if it gets worse?  What if it hits an all time low and you’re stuck with the possibility of losing over half your investment if you sell your Aus$?  How long are you going to hold on to that currency though? 

See, this is the difficulty with not knowing when to quit.  Ideally, a knowledgeable investor would have outlined a stop order right at the start, potentially for $1.4344 Aus$ per US$.  That way, the moment the market started going the wrong way, you’d sell and be out of it. 

Sure, you’d still lose some money, but it is better than losing more than you ever predicted. 

sadly, many still finish up doing precisely what we just talked about in that example, and hold on for far too long, with far too little reason to do so.  End of the day, the choice is yours, but knowing when to give up is unquestionably one characteristic that may serve you well.

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November 28, 2009 · Filed Under Currency Trading

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