How to close a losing trade in Forex. How to close a trade on Forex
Why is there a forced closure of positions while trading on Forex? This issue is mainly of interest to those who have just started their activities related to currency trading.
Stop out, margin call, drain, etc., whatever you call it, but it only means one thing - your trading deposit has reached the minimum acceptable level, or it is no longer there. How does this happen, why and is it possible to technically control this process and close losses?
Why is forced closing of positions in Forex trading in absentia? What is the brokers' initiative?
So, the forced closing of positions in the Forex market occurs at the initiative of brokers, through which traders trade and, as a rule, this situation brings them (traders) a lot of trouble. Why does this happen unexpectedly? The forced closing of positions, completely initiated by brokers, occurs when own funds there are not enough traders on the trading account to provide margin coverage for their trades.
Usually it is traders who unknowingly make mistakes without placing stop orders, violate money management rules, incorrectly determine the direction of the trend, etc. All this leads to the fact that open positions become unprofitable, which forces the broker to forcibly close such positions. In slang, the occurrence of such situations is called "deposit drain". We will consider below how this happens.
How is the forced closing of positions carried out in absentia?
When opening new orders, you will notice that the amount of funds on your personal account begins to constantly change. This happens due to a change in the current state of an open position, i.e. it is either profitable or unprofitable. Such a change, you guessed it, is the reason for the constant change in exchange rates.
Brokers, through which traders trade, automatically track financial results operations carried out by them, since their task is to save their own money, which is used by traders through leverage. As you understood, in any of the scenarios, the company will benefit.
To understand the essence of the problem, how the absentee closing of positions occurs and what are the reasons, it is necessary first of all to define some concepts.
So, the size of the required margin for forex trading is the amount that traders use to open trading positions. Typically, this amount is the ratio of the lot sizes to the leverage itself. You can define it, for example, like this:
Let's assume that the EUR / USD quote is 1.5000, the lot size is EUR 10,000 and the leverage is 1: 100. With this option, the lot size in relation to the leverage (10,000/100), the required collateral will be 100 EUR or 150 USD.
The next concept is the minimum level of collateral, which is key in the forced closure of positions. This parameter can vary from 10% to 50%, but, as a rule, brokers use 20% size. You can see it in the trading terminal with which you make transactions.
Consider an example for which we will use the data above and add a 20% minimum collateral level to it. So, in our example, the minimum collateral level is 30 USD, i.e. 20% of 150, and the remaining 120 can be used to open the next position.
It should be remembered that for open positions, their financial results are also taken into account, i.e. if your position shows losses, for example, by 10 USD, then this amount will naturally be subtracted from the funds available for trading.
Now let's look at an example of the circumstances under which the forced closing of positions by a broker occurs. Let's take the following approximate indicators: current funds on the trading account - 4 495.00, collateral - 346.00. In this case, the margin level will be 4 495/346? 100% \u003d 1 299%. In the event that, under the influence of losses, the size of your trading funds becomes less than 69.20 USD, i.e. the margin level drops below 20% (69.2 / 346? 100% \u003d 20), then the broker has the right to forcibly close such a position.
The main task of the trader is to prevent the occurrence of such situations, but for this it is necessary to figure out for what reasons, forcing brokers to forcibly close positions, they arise.
Forced closing of positions - what are the reasons?
Forced closing of positions in the Forex market can take place according to 2 main scenarios (we will not take into account fraud), which already depend on the trading conditions offered by brokerage companies.
The first scenario of closing positions is a gentle option, when brokers close traders' positions after their deposit reaches the minimum margin level, i.e., as we said above, the amount of funds from 10% to 50% of the unprofitable transaction remains on the trading account.
The second scenario, the one most commonly used by some brokers, is the most devious. Forced closing of positions according to this scenario occurs when the trader's trading account does not have funds left for further trading.
At the same time, such a closure occurs with a small margin, which allows brokers to be guaranteed to avoid their losses. As a result, such forced closing of positions leads to the fact that from a deposit of 150 USD, as in the example above, there remains not $ 30, but a maximum of 5, or even less, it all depends on the case.
So, why do situations arise that force brokers to use the above scenarios for closing trading positions, and for what reasons do they, in fact, arise?
Some brokers may forcibly close a position if its lifetime has expired. For example, under the terms of dealing, one deal cannot last more than two weeks. Therefore, for supporters of long-term trading, it is necessary to carefully study the trading conditions.
Margin Call is used by brokers in cases where they believe that a trader's position is irreversibly threatened, and, accordingly, further provision of leverage can bring losses to the company. When such situations arise, brokers make a decision on absentee, forced closing of positions. Usually, Margin Call appears when less than 20% of the funds remain on the trader's deposit. The decision to use Margin Call in each case is made on an individual basis.
Stop out is an automatic forced closing of positions at current prices, i.e. the decision on its application is not made individually, and is used by brokers when, for a number of reasons, the Margin Call has not been applied.
Well, the Stop out level, as a rule, is indicated separately for different types accounts on the official websites of brokers. When using this type of forced closing of positions in transactions, traders lose up to 90% of their own deposit.
Forced closing of positions - how to avoid it?
To prevent forced closure of their positions on Forex, traders need to take certain measures. Brokers, as a rule, forcefully close only clearly losing trades. To avoid such situations, it is necessary to choose the right trading strategies, as well as to use additional funds to determine the most optimal opportunities for opening positions.
Strictly follow management principles own capital, never take unnecessary risks, timely close trades that are clearly erroneous (unprofitable) and correctly set stop orders and then the broker will not apply forced closing of positions.
BE SURE TO SEE:
Closing positions in trades in fractional parts
It doesn't matter if the trade is profitable or unprofitable. The ability to manage your position well and correctly is the key to good profit.
The reason why many traders do not know how or cannot competently manage a trade is, of course, emotions. Agree, very often there is a desire to move the stop loss when the price approaches it, or just wait for the price to return and close "to zero". Hope dies last, this is an undeniable fact. However, this action can lead, and most often leads to big losses... Emotions play not only when the price goes against us. Very often we can notice ourselves when the price has just started to move in the direction we need, as we already want to close the position as soon as possible. Fear is triggered and this is also normal. Some people manage to overcome this fear, the price continues to move towards take profit, but stops. Greed works, we decide that the price just decided to take a break, after which it will continue its movement. However, this usually does not happen. As the saying goes, the miser pays twice. There are two main points when emotions do not allow us to act correctly, observe risk management and money management. And now we'll talk how to avoid such situations in your trading.
- 1) Installed and forgotten. It is my deep conviction that this is the best technique for getting rid of emotional stress in the market. The principle is very simple: we place an order according to our strategy, set profit and loss fixing levels and turn off the terminal. In any case, even if the stop loss is triggered, this trade was correct, according to the strategy. This means that you can analyze it and make adjustments to your trading methodology.
- 2) The second method deals with stop loss. When the price passes 1-1.5 stop-loss in the right direction, you can move the trade to breakeven, then follow advice # 1. This method differs from the first one in that after moving the level of limiting losses, we continue to move further after each closed candle according to its size.
But this applies to money management and risk management. As for the deals themselves, it is best of course constantly monitor the deal, learn to deal with emotions and become stronger than them. Set the stop loss and take profit levels according to the strategy. But it so happens that the price goes in our direction and suddenly stops. Of course, we need to wait, the price will not always go straight to the profit-taking level. But it so happens that during this stop, a signal appears opposite to the signal of our trade. Definitely need to go out. That is why the best option would be to constantly monitor the situation and track your position in the market.
How and when to properly close ? This topic is of concern to every trader. In general, exiting a position is the most difficult stage in trading. And for me personally too. When concluding a deal on the market, each person is almost sure that he is right (well, or that his system is right), although doubts are always present, and this is normal, nevertheless, “something” makes a person do exactly this way and not otherwise (that is, . buy or sell).
Why is it so difficult to exit a position?
It is easy to make a deal, just click the Buy or Sell buttons and that's it. But when it comes to closing a position, there are always doubts: "maybe not in a hurry, the market can go even further?" or “what if this is the end and if I don’t go out now I will lose all my profit?”. In fact, the trader is between two fires - between greed and fear.
A panacea for these experiences can be TakeProfit, but again, you have the following thoughts: "what if the price does not reach the TakeProfit level" or "maybe it is set too close and it makes sense to move it further?"
As a rule, fear takes over (this is a natural reaction), and the person closes the position (as they say, a bird in the hands is better than a pie in the sky). This is not always true, as I already said, those natural reactions that are inherent in us since childhood are not at all applicable to the market and are the trader's worst enemies. But also overexposing the position is also not worth itsince very often the market is “noisy” and it is very dangerous to be in it. The profit received from the transaction can easily turn into a loss.
How to close a trade deal in this case?
I cannot answer this question unambiguously. The point is that it all depends on the situation. The ability to understand it comes with experience. There is no single rule in the market. Personally, I try to keep every trade to the last and squeeze the maximum out of every trade. Some people set some kind of fixed TakeProfit value (for example 100 points), I can't do that. I'd rather play zero than leave early. In principle, it is not so difficult to take risks, the main thing is that the price initially goes in the right direction, and there it is already possible to set Stop Loss to breakeven.
Imagine what you are buying hoping for. As a rule, the nearest resistance serves as the TakeProfit level. You have 2 options: either exit the market when the price reaches this level and the order is triggered, or take a risk and wait for the breakout of this level and move to the next level ... and again the choice (exit or continue?).
The choice of how to close a trade is always yours.
I can only advise sometimes get the history of transactions and look at the chart when you entered the market, when you exited. You will immediately remember what made you do it this way and not otherwise. Analyze your history and draw conclusions, it will undoubtedly improve your trading.
In general, the analysis of past transactions is simply necessary for you to develop, as trader.
Success in the Forex market is largely determined by the literacy of closing deals.The simplicity and convenience of performing speculative operations using the client terminal attracts many users of the worldwide network to try their skills in the Forex market.
The axiom of success in this event is buying a foreign exchange instrument at a lower price and then selling it at a higher price. In this case, the trend can be directed in any direction, since a similar result can be achieved by selling a currency pair at a high price and buying it in the future at a lower price.
Any Forex trade involves the performance of two operations - opening, or entering the market and closing, or exiting the market. Based on the above reasoning, a trade should be opened after monitoring the market behavior and determining the direction of the trend. The best result can be achieved by opening an order at the beginning of an emerging trend. When opening a deal, a trader risks only in terms of correctly determining the direction of price movement, and in case of great doubt, he can simply refuse to participate in the auction. It's another matter if the market entered the market. Closing a deal is a mandatory procedure and the level of real profit or real loss depends on the correct solution of this issue.
Closing orders manually cannot always guarantee success, since the trader is not able to constantly monitor price movements, especially with a long period of the transaction, as well as technical failures in the network and other unforeseen circumstances. The best option is the use of management tools for closing orders built into the terminal, which allow you to automatically complete a deal when the required profit (take profit) or the maximum allowable loss (stop loss) is reached. Stop-loss and take profit orders should be placed at the moment of opening a trade based on mercantile considerations and expected price behavior.
Depending on the behavior of the market, there are several rules for closing a trade that most experienced traders adhere to:
- the market has gone in the opposite direction, and there are no prerequisites for the trend to reverse. The triggering of the stop-loss order will protect against unacceptable losses in this case;
- the market went in the opposite direction, but did not overcome the resistance or support line. The correct choice of the stop-loss value will allow you to survive the period of loss and achieve a profitable trade completion;
- the market went in the right direction, but did not reach the take profit level. There are precursors of a trend reversal. It is better to close the order manually. A smaller profit is better than any loss;
- the market is moving confidently in the right direction. There are all the prerequisites that the movement will continue. In this case, you can adjust the stop-loss and take profit levels, as well as use the trailing stop mechanism.
In any case, Forex trading without rules almost always leads to a fiasco.
Watch a video tutorial on making deals on Forex:
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