The forex market is a risky place. Placing investments in this market may well make you a profit, but it may just as well make your investment disappear before your eyes.
Luckily, there are ways to limit or minimize the risks you are taking in the forex market, while still leaving your profit potential limitless.
The most basic tool used to limit risk in the forex market is Stop Loss orders. These are a very basic utility that you can find in any respectable forex trading platform.
As you’ve already probably figured out, the purpose of a Stop Loss order is of course to stop your losses.
The order functions by setting a specific amount out of your overall investment or a specific price rate at which the forex broker or the forex platform will close your position in order to prevent further losses.
Some forex platforms also have an automatic Stop Loss order that makes sure that you can’t ever lose more than your original investment. You would be wise to check if the platform you’re currently trading or considering trading with has an automatic Stop Loss order or not.
However, even if your platform does have an automatic Stop Loss order that limits your loss to the exact invested amount, there’s no reason why you should risk the entire sum of your investment.
In most cases you can set a Stop Loss order at as much as half the invested amount giving you the opportunity to halve your overall risk.
You may think that Stop Loss orders are unnecessary precautions, but in the end, they can end up saving you a lot of money.
Similar to Stop Loss orders, most forex platforms also have a Take Profit order for your disposal. The Take Profit order also closes your position at a particular profit amount or once your position reaches a particular price rate. The use of the Take Profit order is not so much to minimize risk as to guarantee that your profit is realized even if you’re not there to monitor the position. Eventually, both orders end up saving you a lot of money, whether in profit or in loss, so it’s recommended that you use both consistently.
Another strategy for minimizing risk is hedging your trades. Hedging is often comparable to taking out an insurance policy on your position by opening several strategic positions at the same time. The purpose of the strategy is to make sure that if one position turns out to be a losing one, you will make profit from another position to make up at least partially for the loss. This way, forex traders can relax knowing that any unforeseen losses will be covered by a backup plan. One hedging option is to take out a futures contract opposite to your position, so that if your position does a reversal, you will make a profit on your futures contract.
A more common and simple hedging solution is to back up your long forex position with a short forex position on a pair that has the same base currency but a different counter currency than your main position. For example, if you’re buying the EUR/USD, a good hedging position would be to sell a smaller amount of the EUR/GBP. This way, your hedging position doesn’t eliminate your original position (if you sold EUR/USD at the same time as buying it you would only be paying the spreads) but it makes sure that if the Euro happened to drop against your expectations you would make a profit on your hedging position.

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