How to Avoid the Forex Trading Death Spiral

Forex Death Spiral

It is often said that 95% of those trading lose money. While the actual percentage is 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 Death Spiral.

The Death Spiral is when a trader suffers a big loss, 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 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.

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 Death Spiral begins you may as well pack it in and save the rest of your capital.

What is the Death Spiral?

As I noted, the Forex Trading Death Spiral is when a trader suffers a loss that is hard to recover from. It is like a point of no return. Either you go 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, or just wait for the inevitable point of pain or margin call 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 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 and experienced and professional traders. The 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 Death Spiral. You can do that by:
• Treating 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 overleverage!
• Take the word HOPE out of your trading dictionary. Do not let a losing position run based on hope when your analysis suggests otherwise.
• Using house money if you want to increase leverage. Do so when the starts 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.
• The market is mindless. Don’t treat it as your enemy, Read this article: The market Is Not Your Enemy

To sum up, avoid the Forex Trading Death Spiral if you want to stay in the trading game.