Price effect
Forex traders need to know when to cut their losses. This is difficult for inexperienced traders, and they often lose large amounts of money by holding on to unprofitable positions. This is the price effect, and you need to avoid it.
Here's what happens:
- You spend days analysing a currency and decide it should go up
- You're so convinced that you decide to make a major investment
- You wait until the timing is exactly right and invest most of your available funds
- Your order is filled
- The currency starts to go down
- You check if anything has happened that could account for this
- There isn't and you decide to hang on
- The currency goes down further
At this point, the price effect kicks in. The initial drop could have been a blip, and you might have been right to hang on. Now, however, you don't want to lose all your hard work, and you're probably hoping to get your losses back. You can't admit the investment was a mistake, so you keep hanging on and lose the entire amount.
The price effect happens when your emotions overcome your common sense. No matter what your analysis told you, if a currency is dropping, it's dropping, and you need to cut your losses. When you make an investment, decide how much you're willing to lose, and stick to it. Don't let your emotions take over and don't keep chasing losing propositions.
The best way to learn this discipline is to trade and see where you go wrong. Open a Cent Account and you'll be able to do this without taking major risks.
