Importance of Knowing When to Quit in currency exchange

Posted on December 11, 2009
Filed Under Day Online Trading, Forex | Leave a Comment

Significance of Knowing When to Quit in foreign exchange

As much as you’ve doubtless heard how a lot of folks struck it big in the forex market, you’d also definitely have come across the various horror stories from those that lost a lot of cash really 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 situation is that many folk do end up losing money in the forex for a very easy reason : they don’t know when to give up.

To explain what we mean, let’s go over a fast example. Say you have US$ 100,000 that you need to take a position in the currency market. That isn’t a tacky amount, and you figure that if you choose the right investment, you could truly make a fortune.

So you look 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 great idea since it looks to be rather high and the Australian Dollar will most likely pick up shortly.

With that, you purchase into that currency, and you now 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 this point, if you were to sell you’d finish up losing a ton.

instead of selling and stopping 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 point you figure that it isn’t going to get much worse, and so you decide to hold for a while more. But what if it does get worse? What if it hits an all time 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 problem with without knowing when to quit. Ideally, a savvy investor would have outlined a stop order right at the start, probably for $1.4344 Aus$ per US$. That way, the instant the market began going the wrong way, you’d sell and be out of it.

Sure, you’d still lose some money, but it’s much better than losing more than you ever expected.

unfortunately, plenty 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 definitely one trait which will serve you well.

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