Importance of Knowing When to Quit in forex
As much as you have probably heard how a lot of folk struck it big in the foreign exchange market, you’d also undoubtedly have come across the numerous horror stories from those who lost a lot of cash very quickly.
Dependent on how skeptical you are you may either take these horror stories very seriously, or not seriously enough. Either way the fact of the matter is that many people do end up losing money in the foreign exchange for a particularly straightforward reason : they do not know when to give up.
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 forex market. That’s not a tacky amount, and you figure that if you pick the correct investment, you could truly make a fortune.
So you glance at the market, and feel that using your US$ 100,000 to buy Aus$, which is at present being sold at 1.4244 Aus$ per US$, would be an excellent idea since it seems to be quite high and the Australian greenback will probably pick up soon.
With that, you purchase into that currency, and you presently have Aus$ 142,440. Great!
Sadly, this is where things start to go bad. Rather than the exchange rate improving, it actually does the opposite, and after 24 hours you find that it is now 1.4544 Aus$ per US$. At that point, if you were to sell you’d finish up losing a ton.
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instead of selling and finishing up losing, you choose to wait and hope that it improves. Come the next day though, you find the exchange rate has fluctuated in the wrong direction again, and is now 1.4554 Aus$ per US$.
At this stage you figure that it does not go to get much worse, and so you choose to hold for a while more. But what if it gets worse? What if it hits a record low and you are stuck with the chance of losing over half your investment if you sell your Aus$? 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 savvy financier would have defined a stop order right at the start, probably for $1.4344 Aus$ per US$. That way, the moment the market commenced going the wrong way, you’d sell and be out of it.
Sure, you’d still lose some cash, but it’s way better than losing more than you ever predicted.
unfortunately, many still end up doing exactly what we just discussed in that example, and hold on for far too long, with far not enough reason to do so. End of the day, the choice is yours, but knowing when to quit is certainly one feature which will serve you well.
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