A trade closed at breakeven is one that is neither a winner nor a loser. It closes at a particular price where profit and losses both equal to zero, or close enough.
The beauty of breakeven trades is that, although you may not increase your account with them, they enable you to protect your capital, which is crucial when being a part of this game.
Let's discuss the two types of regular breakeven trades and the psychology behind them.
- The market initially moves in your favour
- The market begins to turn around
- You mentally exit at breakeven, or your adjusted stop loss at breakeven gets triggered
- The market reverses again, eventually hitting your profit target
The above scenario usually unfolds through wild swings of price action and unpredictable market events, and it's a smart move to protect your capital and exit at breakeven.
However, traders often end up with breakeven trades for the wrong reasons, usually encounter fear and see a positive trade turn negative.
- The market goes against you
- The market begins to turn around, and you approach breakeven
- You mentally exit once you see some profit
- The market reverses again, eventually hitting your stop loss
You've been in a trade that hasn't been going well, and you are finally starting to see price creep back towards your entry level. Although it's never really a good idea to let losing trades run, doing so can work to our advantage.
As the saying says, "cut losses short, let profits run", and of course no one wants to close out on a trade in a loss, but sometimes it's the better thing to do; it gives you more time and energy to focus on other potential setups, instead of dreading the losing trade you're in right now.
Hope can lead a trader to hold a losing trade which they should have exited a long time ago. Closing a trade at breakeven is the best that you can do, and that doing so can save you from taking on more significant losses than necessary.
But obviously, no one knows exactly what will happen, so it's not like we can "choose" which scenario we want to make a reality. It's way easier said than done, but the message I'm trying to portray here, is that it's okay to close out early on a trade that is not moving in your favour.
It's essential to keep track of your breakeven trades; they reveal a lot about how you keep yourself together in times of extreme stress.
Next time you close at breakeven, take a step back and ask yourself what that zero in the P/L 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, or hope?
Charge it towards your experience, make the adjustment to your forex trading plans, and move forward.