At the bottom of every forex broker’s webpage,
there is always a disclaimer that forex trading is risky. But that does not
mean it is not a good investment opportunity. Forex trading is one of the best
ways of making money online, though only if the risks involved are well taken
care of.
What does Forex Risk Management involve? It is
simply a combination of strategies that traders can use to minimize the risk of
losing their investment or better put, to maximize their profits.
Before we get into the risk management tips, it is
important to point out that in forex there is always losses and profits. There
is no trading strategy that is 100% accurate to make only profits every time. A
successful forex trading strategy is that strategy that makes more profits than
losses so that the sum of the two is positive and not negative.
Tips of how to manage forex
trading risks
1. Get a reputable regulated broker
Choosing a forex broker is
always the first step when starting to trade forex. There are lots of forex
broker scams out there and you should do due diligence to ensure you don’t fall
into their hands.
As such, you should ensure that the trader is
reputable; the broker does not have a bad history with regulatory authorities,
no court cases or bad blood with other traders. You can determine a broker’s
reputation by going through different reviews online.
It is also advisable to choose a broker that is
regulated. The regulatory authority framework ensures that the broker conducts
their business within a certain code of conduct that protects the trader’s or
investor’s interest. And in case you have any disputes with the broker, the
regulatory authority can always act as the intermediary.
2. Always start by using the demo account
A demo account is an important tool for forex
traders.
Though it is mostly viewed as an account for
beginners, it is a great place to test anything before using it on the real
trading account. If you come up with a trading strategy, you should first
ensure that you test it thoroughly in the demo account first. If you get an
automated Expert Advisor, you should also test it in the demo account.
That way, you will be able to come up with a
successful forex trading strategy.
3. Before placing any trade, it is important to
calculate the odds
You should avoid trading just because you opened
the chart and found the market trending in a certain direction. At times
markets misbehave due to certain reasons and if you are not careful you could
find yourself on the wrong side of the market especially if there is a news
release.
Therefore, it is always important to do a technical
or fundamental analysis of the market before placing any trade.
Fundamental analysis involves researching the
various events around the world affects the economies and value of the currencies
of different countries. These events will always affect the market.
You can always use forex technical indicators,
which are programmed to identify certain conditions that tell if the conditions
are right for placing a trade or not.
4. Use of stop levels (Stoploss, take profit, and
trailing stop)
After calculating the odds, it is always important
to use stoploss, take profit or trailing stops.
Stoploss levels help in avoiding to make huge
losses that you didn’t anticipate.
Take profits and trailing stops ensure that you
exit the market once your anticipated profits are hit before the market
reverses.
5. Avoid revenge trading
Always remember there are times to make losses and
times to make profits in forex. Always follow your trading strategy as long as it
has proved to be successful especially after testing it on the demo account.
If you make a loss, don’t be in a hurry to get back
into the market to revenge the loss. Always wait for your trading strategy to
indicate that the conditions are right to place a certain trade. Revenge
trading could lead to larger and larger losses.
6. Avoid having too many trades open at the same
time
You should maintain a free margin of about 75% to
give the trades room to stay as long as possible even if the market starts by
moving against you. Placing too many trades could make you be stopped out in
case the losses exceed the stop out level of your broker.
You should also use a reasonable lot sizes.
