A break-even deal is a neither winning nor losing trade. It closes at a certain price where the profit and loss are equal to zero.
Sure, you rarely get praise from others (as well as yourself) for break-even deals. But don’t take them for granted!
The beauty of break-even deals is that although you may not increase your account with them, they enable you to protect your capital.
Let me discuss the two types of breakeven trading and the psychology behind them.
Let’s start with the case of a tie deal that could have been a winner. Do these scenarios sound familiar?
- The market initially moves in your favor.
- The market either turns around and you manually exit at breakeven, or the market triggers your stop loss to breakeven.
- The market reverses trends again, and eventually reaches your profit target.
Sometimes, the above scenario unfolds through extreme swings in price action, and in cases of unexpected news or market event (perhaps invalidating fundamental analysis), it’s a smart move to protect capital and exit at breakeven.
Then there are instances where a trader may end up with a breakeven trade for the wrong reasons, such as fear of seeing a positive trade turn negative.
Now, let’s take a look at a forex trade that would have been a losing trade. It often looks like this:
- The market moves against you.
- The market turns around and you exit at break even.
- The market reverses directions again, and eventually hits the initial stop loss.
We’ve all struggled with holding on to losing trades at some point. Sometimes, doing so can be to our advantage. But it is not always a good idea to let losing trades run.
Hope can lead a trader to hold on to a losing trade long after they should have exited. What you have to keep in mind is that it is okay to cut losses early on.
Sometimes, if the story changes, closing the trade at breakeven is the best you can do, and this can save you from incurring more losses than necessary.
In general, it’s important to keep track of your breakeven trades because they reveal a lot about how to keep your emotions in check during times of high stress.
So, the next time you close your trade at breakeven, take a step back and look at your trading plan. Ask yourself what that zero means in the profit and loss column.
Did you execute your trade according to plan and the market didn’t go your way? Or are you overcome with fear, greed and/or hope?
Whatever your answer, think about what you could have done differently.
If you realize that you have let your emotions get the best of you, causing you to close your trade out of fear, greed and/or hope, don’t be so hard on yourself.
Charge it up to try it out, tweak your forex trading plans, and move on.