Andrew Bezen

Financial Writer

Forex Tips

Risk Management when Trading Forex

Risk Management when Trading Forex

It is not uncommon to hear newbie forex traders saying just how easy it is to make money when trading Forex. However, Forex trading requires patience, commitment, dedication, and time to have a success story in this trading.

A trader cannot open positions in a trading platform without first consulting your Forex broker. That way, you’ll be able to know the conditions they’ve set for trading. You’ll also get to know counterparty risks, liquidity, leverage and the market.

What’s more, you need to be conversant with techniques and tools you should apply to manage your risks and money safely. Failure to do these things will mean that you’re gambling rather than trading.

How to Manage Risks when trading Forex     

  • Trade money that’s not needed.

This may sound like an obvious point, but it is an essential one to repeat. Newbies and experienced traders tend to overlook this point with the assumption that it will not happen. Just like gambling, traders shouldn’t put all their money in. Doing so is taking very unnecessary risks, which will result in emotional stress and pressure when trading. This pressure will only increase your chances of making mistakes as you trade.

  • Make use of limit and stop-loss orders.

Orders are the trade instructions you get from your broker when a given level is attained in an underlying market. Stop-loss orders are in open positions to assist you in getting out of any trade should the market move in the opposite direction. Simply put, the order will stop your loss.

  • Do you have risk tolerance?

Before trading begins, you should determine how much you can tolerate. Your determination should be based on:

  • Your experience
  • Your age
  • Your FX trading knowledge
  • The amount you can handle losing
  • The investment goals you have set

Doing this assessment is not just so that you will sleep better at night or reduce your currency fluctuation stress. It is about having control of any situation because the amount you’re trading is the correct amount, vis-à-vis your current financial objectives in relation to your financial situation.

When trading is kept within a manageable risk, chances of successful trading increase.

  • Set or have a 1:2 minimum risk ratio.

You need to be conversant with the RRR (risk/reward ratio) when trading Forex. Doing so increases the chances of long-run profitability. RRR compares and measures the distance between your take-profit and stop-loss orders and entry points.

If you are a day or scalper trader, keep your RRR at a minimum of 1:2 ratio. On the other hand, position and swing traders can have a wider minimum RRR ratio of 1:3.

  • Risk control per trade.

Newbie traders should consider their risk per trade as a percentage of their trading capital, thus setting it to a conventional level. This is because inexperienced traders are more likely to make mistakes as compared to experienced traders.

Traders should risk only a fraction of the capital per trade. To start, consider risking about 1% of the capital per trade. If the RRR you are applying is a good one, it means you’ll be risking 1% for a possible 3% return.

  • Be consistent with the risk.

You will be tempted to increase your positions’ size when you begin making a profit. This is an excellent example of a person wanting to wipe out their account. Always be consistent with your risk. Remember, making a few wins while trading does not guarantee that the next trade will also yield profit. Avoid being over-confident and not being risk-averse. This has seen many traders change their risk management rules and money without concrete reasons.

  • Be conversant with leverage.

Using leverage products like spread bets, CFDs, and spot Forex mean that you can trade money that exceeds the initial deposit. Your broker will request that a portion of a position’s total value be put aside as collateral. While leverage can magnify your profits quickly, the opposite is also true. Hence the need to fully understand how margin and leverage trading works.

Conclusion

It is imperative that you learn about leverage risks and how they work. Once you actively manage them, you will be well on your way to being a good trader. Remember, you shouldn’t focus too much on making money; instead, protect your investments when trading Forex.

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