As much as you’ve probably heard how a lot of people struck it big in the forex market, you’d also undoubtedly have come across the various horror stories from those who lost a ton of money really quickly.
Depending on how skeptical you are, you might either take these horror stories very seriously, or not seriously enough. Either way — the fact of the matter is that many people do end up losing money in the forex for a very simple reason: They don’t know when to quit.
To illustrate what we mean, let’s go over a quick example. Say you have US$ 100,000 that you want to invest in the forex market. That’s not a shabby amount, and you figure that if you pick the right investment, you could really make a killing.
So you look at the market, and feel that using your US$ 100,000 to buy Aus$, which is currently being sold at 1.4244 Aus$ per US$, would be a good idea since it seems to be pretty high and the Australian Dollar will probably pick up soon.
With that, you buy into that currency, and you now have Aus$ 142,440. Great!
Unfortunately, this is where things start to go wrong. Instead of the exchange rate improving, it actually does the opposite, and after 24 hours you find that it is now 1.4544 Aus$ per US$. At this point, if you were to sell you’d end up losing a ton.
Instead of selling and ending up losing, you decide to wait and hope that it improves. Come the next day though, you find that the exchange rate has fluctuated in the wrong direction again, and is now 1.4554 Aus$ per US$.
At this stage you figure that it isn’t going to get much worse, and so you decide to hold for a while more. But what if it does get worse? What if it hits an all time low and you’re stuck with the prospect of losing over half your investment if you sell your Aus$? How long are you going to hold on to that currency though?
See, this is the problem with not knowing when to quit. Ideally, a savvy investor would have defined a stop order right at the start, probably for $1.4344 Aus$ per US$. That way, the minute the market began going the wrong way, you’d sell and be out of it.
Sure, you’d still lose some money, but it is better than losing more than you ever expected.
Unfortunately, many still end up doing exactly 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 quit is definitely one trait that will serve you well.