Every trading or transaction or open position, sometimes you will lose first. This is due to price movements or price fluctuations. For example, you are doing BUY EURUSD at 1.32100 level. There is always a chance the price will move down it first so you will experience a temporary loss until your position is closed. Correct?
Well, a very important question, how to limit losses with cut loss? Where is the right cut loss level? The answer to this question becomes debatable because the cut loss level can be at any level but one is for sure, you should not allow protracted losses.
Good forex traders always know when to cut loss in the market. Taking advantage (TP) early and allowing a protracted loss is a mistake made by many beginner traders.
In every advice and education of forex trading, you are required to perform an analysis and a trading plan before you trade or enter a position in the market. Sometimes your beliefs about your own analysis and trading plan will decrease as price movements and market sentiment develop. Then, how?
Detecting Market Sentiment Developments
Yes, the market is dynamic. Includes the sentiments and factors that affect it over time. This change of sentiment can be marked as a reversal potential (reversal).
You should avoid trading near the potential of the reversal area. Like doing BUY placed on the pivot or the psychological level of resistance, or SELL is placed too close to the pivot or the psychological level of support. If this has happened then you should be wary of all the developments of market sentiment.
Reacts Quickly to Market Sentiment Changes
When market sentiment changes and goes against the direction of your trading, then you should be able to react quickly to changes in market sentiment. You must close the position and do not have to wait for the stop level you made on the initial trading plan triggered. Or you can also do switch position management and create a new trading plan.
Cut Loss can be done by placing a stop level on your trading plan and also through an impulsive decision or your quick reaction to the development of market sentiment.