One of the most debated topics in the forex trading world is risk management. On one hand, traders want to reduce their potential losses as much as possible, but on the other hand, they also want to benefit by making the most potential profit from every trade. Moreover, there is also the common belief that if you want to gain high returns, then you have to take greater risks. However, the primary reason that most forex traders lose money is not because of their inexperience; it is due to poor risk management.
The forex trading market is already risky because of its volatility, which makes risk management non-negotiable for those who wish to be successful. But, how do you go about forex risk management? Mentioned below are some easy and effective tips to do exactly that:
- Educate yourself about forex and its risks
If you are just beginning your journey in the forex market, you will need some education. It is a good idea to approach forex trading like you would any other career. Luckily, there are a wide range of educational resources that you can find nowadays, which include Forex e-books, articles, videos and even webinars. You can accumulate a lot of knowledge about the market and even put it to test through free demo trading accounts provided by brokers. They allow you to use virtual funds for trading in a simulated market and help you in testing various trading strategies.
- Use a stop loss for managing forex risks
A stop loss is a risk management tool that protects your trades from unexpected movements in the market. It is basically a predetermined price at which your trade will close. Thus, if you open a trade in the hope that the value of an asset will increase, but it decreases, then the trade will close once it reaches your stop loss price. This will prevent any further losses. Most professional brokers, such as Active Brokerz, recommend that traders always set their stop losses before opening a trade. You can set it at a level that means you will not lose more than 2% of your trading balance for a given trade.
- Avoid risking more than you can afford to lose
One of the primary risk management rules in the forex trading markets is that you shouldn’t risk more money than you can afford to lose. With that being said, it is a common mistake made by Forex traders who are just starting out. The forex market is an unpredictable one and you will make yourself vulnerable to a lot of risks if you invest more than you can afford to lose.
- Restrict your use of leverage
In a nutshell, leverage provides traders the opportunity of magnifying their profits from their trading account, but it also increases your risks. If you can make 10 times more profits through a leverage of 1:10, then it means you can also incur 10 times more losses in case the trade doesn’t go your way. Therefore, the higher the leverage, the greater your exposure to risk.
Active Brokerz and others in the market offer you plenty of leverage for forex trading, but when you are just starting out, it is a good idea to avoid leverage. It should only be used when you have a clear understanding of any potential losses. As long as you do that, you will not have to put up with any major losses to your trading portfolio.
- Always maintain realistic profit expectations
One of the biggest reasons that new forex traders tend to be more aggressive in the market is because of their unrealistic expectations when it comes to profits. They believe that trading aggressively can help them in making a return on their investment quickly. However, the most successful traders are those who make steady returns. The right way to start trading is to set realistic goals and then maintain a conservative approach when making trades in the market. Being realistic also means that you admit when you are wrong. When you have clear evidence that you have made a bad trade, it is necessary that you exit right away. Adding to a losing trade is never a good idea.
Use these tips and manage your forex trading risks in the best possible way to minimize your losses.