Updated from its original posting on 2012-06-29
Every single forex trader out there wants to be profitable, the most basic measure of which comes in the form of net profits and losses. And so, it is common to see traders not pay attention to their breakeven trades. What many don’t realize though is that there’s more to them than just the zeroes they register in your trading journals.
But before we get ahead of ourselves, let’s first define breakeven trades.
Our Forexpedia defines the breakeven point as the level where gains equal to losses. Therefore, a breakeven trade is one that is neither a winner nor a loser. It closes at a particular price where profit and loss both equal to zero.
Sure, you rarely get praises from others (as well as yourself) for breakeven trades, but don’t take them for granted! The beauty of breakeven trades is that although you may not increase your account with them, they do enable you to protect your capital.
Of course, I also understand that no one wants to be just a breakeven trader. However, as I have said in the past, the journey to becoming consistently profitable is not an easy one filled with winning trades. You also need to learn how to deal with the losses and the trades with zero returns.
To help you with the latter, let me discuss the two kinds of breakeven trades and the psychology behind them:
Let’s start off with the case of a breakeven trade that would have been a winner. Does the following sound familiar?
- The market initially moves in your favor.
- The market turns around and you manually exit at breakeven, or the market triggers your stop loss trailed to breakeven.
- The market reverses directions again, eventually hitting your profit target.
Sometimes, the above scenario unfolds through wild swings in price action, and in cases of an unpredictable news or market event (possibly invalidating fundamental analysis), it’s a smart move to protect one’s capital and exit at breakeven.
Of course, there are also cases wherein a trader may end up with a breakeven trade for the wrong reasons, such as the fear of seeing a positive trade turn negative.
Now, let’s take a look at the breakeven trade that would’ve turned out to be a loser. It often looks like this:
- The market moves against you.
- The market turns around and you exit at breakeven.
- The market reverses directions again, eventually hitting your initial stop loss.
We’ve all experienced holding on to losing trades at some point in time. Sometimes, doing so can work to our advantage. But it’s not always a good idea to let losing trades run.
Hope can lead a trader to hold on to a losing trade long after he or she should’ve exited. What you have to keep in mind is that it’s okay to cut losses early. Sometimes, if the story changes, closing a trade at breakeven is the best that you can do and that doing so can save you from taking on bigger losses than necessary.
All in all, it’s important to keep track of your breakeven trades because they reveal a lot about how you keep your emotions in check in times of extreme 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 in your profit and loss column means. Did you execute your trade according to plan and the market just didn’t go your way? Or were you overcome by fear, greed, and/or hope?
Whatever your answer is, think about what you could’ve done differently. If you realize that you let your emotions get the best of you, causing you to close your trade on fear, greed, and/or hope, don’t be too hard on yourself. Charge it to experience, make the adjustment to your trading plans, and move forward.