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One of the most important lessons any forex trader needs to learn is how to get out of a losing position. There may come a point in your trading career when you find yourself in a trade that is deep underwater. If you continue with the trade, you may get your account wiped out. First practice on your forex demo account. Learn swing trading. Get Netpicks forex signals signals free.

Let’s still suppose that there is a run away trade confronting you. Although in my opinion if you follow proper money management rules, this type of situation should never arise. What we are talking about is a run away position that has the potential of wiping out the equity in your account.

When holding onto a big loser, most traders have two choices. 1) Cut the position immediately and avoid a huge loss. 2) Try to average down and hope for a turn around in your favor.

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In one you should accept a big monetary hit. In the second approach you place all your chips on the table and hope for the best. Neither approach is attractive. Good news for you. There is a third way those great traders always use.

Great traders simply refuse to take an outright loss by way of a stop. Once they realize that the market has proven them wrong they slowly begin to trade their way out of a losing position.

Your mission should be to better your average cost without adding to the position once you realize that you have a losing position that you need to get out. Adding to the position will only create more pain and sorrow for you.

Adding to a losing position can also quickly take away your flexibility as the loss grows and becomes unmanageable. You need to cut part of it to create a more breathing room for yourself and be able to trade out of the rest.

How can this happen? Suppose that you had gone short in a downtrend. After sometime the trend suddenly reversed and turned into an uptrend. Now you are in a losing position because the trend has reversed. You have three choices with you:

1) Hold onto the losing position and hope that the trend will again reverse itself before you receive your margin call. 2) Get out of everything and take a substantial loss. 3) Cut part of the position on any reasonable dip.

There are two benefits of cutting your position on a dip. Firstly, although you are going to take an initial loss, you are in fact freeing up liquidity to react to future price moves. Any move now is a good move.

If the currency pair bounces higher, you can reload at better selling levels to improve your average cost. On the other hand, if it immediately collapses then great, it is moving in your direction.

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