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.