Profit and Loss Taking in Forex

Profit and Loss Taking in Forex

When people get into Forex, the first thing they think about is “making money”. Although this isn’t really wrong, the fact is that the Foreign Exchange market can be unpredictable. Like the stock market, there are chances that traders will lose money instead of profiting and vice versa. For this reason, traders would have to learn about profit and loss taking in the Forex market. This way, they would be able to control the amount of money they have in circulation.

Exacting Limitations

Basically, profit and loss taking is like putting “limitations” when trading. As most Forex blog articles would state, traders need to learn when they have reached their peak or start cutting losses. For example, a trader could enact profit taking by stating a specific amount like 100 points or more. This means that if the value of their recent purchase escalates to more than they paid for, possibly reaching 100 points in profit, then it’s time to sell or “taking profit” from the transaction.

On the other hand, taking a loss in the Forex system is the exact opposite. This means letting go when the amount hits lower than what a person expected. At this point, they will have to “let go” because any further would just make them lose more money.

Importance of Taking Profit and Loss

So why is this important? Taking profit is something that should be done before traders get struck by something as common as greed. The fact is that the trading system can be extremely volatile, which means that a “rising” currency wouldn’t always be on the rise for long. If a trader waits too long in the hope of gaining more, there’s a good chance that the price would plummet and they will find themselves losing rather than earning.

See also  Basics of Forensic Accounting

The same can be said for taking loss in Foreign Exchange. If a price plummets, traders need to know when they have to let the amount go to avoid losing more in the process.

By closing their position before anything untoward happens, traders find themselves getting good profits from the system.

How to Arrive at Profit and Loss Taking

So how exactly would a person decide on when they have had enough in terms of transactions? This usually varied from one person to another, depending on what kind of trader they are. Those who are prone to risky endeavors wouldn’t have any problems setting the limitations higher while others try to play it safe.

This is also where good information comes in. The amount of risk a person is willing to take usually depends on several factors. One of those is the amount of reward they could possibly get. Another is if there is a strong possibility of actually coming out on top. This is where Time Frames and Risk to Reward Ratios come in. By studying these important factors, traders would find themselves raising or lowering their limits depending on the situation in the trading system. Being well versed in jargons like Pip Making, EURUSD and others would also be extremely helpful in the long run.