How to Avoid the Forex Death Spiral
It is often said that 95% of those trading forex lose money. While the actual percentage is probably not that high, it is a fact that the majority of forex traders lose. There may be many reasons for it but the one I see as a major one is what I call the Forex Death Spiral.
The Forex Death Spiral occurs when a trader suffers a big loss or a losing day, more than he/she is prepared to lose and never recovers from it. I cannot emphasize enough how important it is to avoid reaching this point. I have seen too many accounts blow up and traders who possess some skill or potential get wiped out in a Death Spiral. The following are some of the reasons that may set off the Forex Death Spiral:
- Not using a stop
- Letting a loser run in the HOPE the market will recover
- Averaging down or up by adding to a losing position (e.g. doubling up)
- Poor money management: e.g. overleveraging
- Treating the market as your enemy by repeating losing trades.
- Hedging a loser and then trying to trade out of it to recover a loss
These are just some of the reasons but the main cause is usually a lack of discipline. An objective of trading is to preserve capital so you can keep trading. When the Forex Death Spiral begins you may as well pack it in and save the rest of your capital.
What is the Forex Death Spiral?
As I noted, the Forex Death Spiral is when a trader suffers a loss (either on one trade or a series of trades) or a losing day that is hard to recover from. It is like a point of no return. Either you
- into a shell and stop trading,
- throw discipline out the door in an attempt to make your money back,
- get gun shy and take profits too quickly and let losses run,
- trade not to lose by using too tight stops that continually get triggered even when right
- just wait for the inevitable point of pain as your losing position goes farther and farther into the red.
In most cases, confidence is shaken beyond repair and the result is the same. Either you stay in the forex trading game and see what is left in your account slowly erode or call it quits and never return. Some will replenish their accounts in an attempt to recoup their losses but never really recover from that big loss. Others will just walk away.
It is like going to a casino and losing more than you intended on one big bet. You find it hard to recover and then go into a Death Spiral. You reach a point where your only hope is a big score. You bet what is left in your pocket and blow it on one trade. You walk away busted.
I have seen this happen to newbies as well as experienced and professional forex traders. The Forex Death Spiral is like a terminal disease but can be avoided.
How to Avoid the Death Spiral
I can answer that with one word: DISCIPLINE. Stay disciplined and you can avoid that one big loss that sends you into a Forex Death Spiral. You can do that by:
- Treat trading as a business and not a casino. A successful business will not risk more than is prudent on any one venture.
- Avoid risking too much of your capital on any one trade. In other words, don’t over-leverage!
- Take the word HOPE out of your trading dictionary. Do not let a losing position run based on hope when your analysis suggests otherwise.
- Use house money if you want to increase leverage. Do so when the stars align in your analysis and only from profits so you are not risking your base capital.
- Control your risk. ALWAYS USE STOPS. Live to trade another day.
- Don’t double up on a losing position unless it is part of your trading plan.
- Take your loss and move on. Avoid hedging a loser so you don't have to book a loss.
- The market is mindless, don’t treat it as your enemy,
To sum up, Avoid the Forex Death Spiral if you want to stay in the forex trading game.
Jay Meisler, founder
Global Traders Association
