Stop the living dead trades from draining your margin and profit potential
Zombie trades can eat up your capital and limit gains. Learn to identify and exit them to maximize your Forex trading potential!
What are Zombie Trades?
Zombie trades are positions that stay open far longer than expected, showing little to no movement in either direction. These positions might hover near break-even or oscillate in a tight range, going nowhere.
For instance, imagine you open a long EUR/USD trade at 1.0800, expecting a rise in the pair. After weeks, the price fluctuates between 1.0790 and 1.0810, barely moving. This can be classified as a zombie trade since your capital and margin are locked up with minimal potential for gain.
How Zombie Trades Eat Up Your Margin
Zombie trades not only tie up your capital but also consume margin, restricting your ability to open other trades. The margin required depends on your leverage, and higher leverage can exacerbate the impact of a stagnant trade.
Let’s say you have $10,000 in your trading account and you’re trading with 50:1 leverage. You enter a 1 standard lot (100,000 units) position in EUR/USD at 1.0800. The required margin for this trade would be around $2,000 (2% risk percentage). If the trade doesn’t move, that $2,000 remains tied up, limiting the margin available for other trades. The more stagnant the position, the more you limit your ability to capitalize on fresh trading opportunities.
Accumulating Losses: The Cost of Holding Living Dead Trades
In addition to margin usage, zombie trades may incur ongoing costs like swap fees. These fees apply when you hold positions overnight, particularly when you trade currency pairs with an interest rate differential.
For instance, if you are holding a long USD/JPY position and the interest rate on the yen is higher than that of the dollar, you could be paying a negative swap rate each day. If this rate is -0.50 pips per day, over 30 days, you could end up paying 15 pips in swap fees, which would amount to $150 on a standard lot position.
Zombie trades that linger for weeks or months can quietly rack up these fees, eating into your profits or deepening your losses.
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Recognizing When a Trade is Dead
Recognizing a zombie trade before it causes too much damage is crucial. Here are some warning signs:
Minimal price movement: The trade remains stuck in a tight range for weeks, such as EUR/USD moving between 1.0790 and 1.0810 with no breakout.
Changed fundamentals: Market conditions or key economic data no longer support your original trade idea, yet the trade is still open.
Lack of a clear exit plan: If you’re holding onto the position out of hope or fear, it’s time to reevaluate.
For instance, if you bought GBP/USD at 1.2500 and after a month, the price has barely moved beyond 20 pips, it may be time to close it. Holding onto these trades could prevent you from deploying capital in better opportunities.
The Opportunity Cost of Living Dead Trades
The opportunity cost of keeping a zombie trade open can be significant. Your margin is tied up in a trade with little movement, making it unavailable for better trading setups.
For example, if your margin is consumed by a long EUR/USD position that hasn’t moved much, you might miss out on a lucrative breakout in GBP/JPY. Suppose GBP/JPY rallies 100 pips, and you miss the opportunity to profit because your margin is tied up. On a 1 standard lot (100,000 units), a 100-pip move could have netted you $1,000, a significant opportunity lost simply because you were holding onto a dead trade.
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Strategies to Terminate Zombie Trades
Exiting a zombie trade before it erodes your performance is essential. Here are a few strategies:
Set time-based limits: Establish a rule for how long you’ll hold a trade. If a position hasn’t moved after a set period, such as two weeks, close it.
Use stop-loss orders: Prevent your trade from turning into a zombie by setting a stop-loss at a specific level. This can help you exit automatically if the market doesn’t move in your favor.
Reassess fundamentals and technicals: If the market conditions have shifted, and there’s no longer a valid reason to keep the trade open, it’s better to exit.
For instance, if your EUR/USD trade, opened at 1.0800, hasn’t shown significant movement after two weeks, consider closing it. Even if the price is at 1.0805, a tiny gain is better than letting the trade consume margin without showing much potential for profit.
Conclusion:
Zombie trades can quietly drain your account by tying up capital, accumulating swap fees, and preventing you from taking advantage of better opportunities. By recognizing when a trade is no longer performing and cutting it off quickly, you can free up your margin for more productive trades. Clear strategies, such as setting time limits or stop-loss orders, can help prevent your portfolio from being “devoured” by these dead positions.
Be sure to check out our previous economic blog entry where we explain how Moving Averages affect Forex trading
