Tips For Forex Risk Management
Forex risk management is a vital facet of trading. Risk management is the only component of trades that is entirely under your control.
Leverage is a good way to grow your account, but the downsides in the form of risk must be properly mitigated so as not to blow your account.
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Know Your Limits
While the forex market presents an opportunity of huge profits, it is not exempted from the reality of losing on your trade, which can be curbed through the proper use of risk management tools like the simple ones listed above: 1)set your risk appetite; 2)use stop loss in placing your trades; 3)properly applying position sizing; 4)managing your emotions to maintain your profit or loss results.
One of the ten commandments of forex risk management is: Thou shalt never risk more than thou canst lose. So you can seriously hurt yourself – financially – if you do not follow this precept.
Another way to combat this kind of risk is to make sure you don’t allocate too much of your portfolio to forex trading. For example, if your total money-market portfolio is worth $1 million, then no more than $500,000 should be in forex assets (that is, 50 per cent of your portfolio). The investment advice of putting all your eggs in one basket is less relevant to the forex market. The most important strategy to pursue is diversification.
Look at the History of the Currency Pair
How to deal with risk is the most important part of trading in Forex. Traders want to operate in such a way they minimize the potential of losing a lot of money, while, at the same time, maximize the potential of winning.
Keep them, however, to a small size, so that you do not over-invest yourself; also, diversify them across numerous, unrelated trades so that hidden market patterns will be less likely to simultaneously damage all of them; diversify your portfolio across currencies, assets and risk levels, so as not to lose all of your investment at once.
For instance, just trading EUR USD could put you at more risk than you realise and that’s why you must diversify your currency pairs – more than ever and especially now that COVID-19 has affected everybody.
Use Stop and Limit Orders
Finally, an order type is designed to trigger an automatic entry at a level or price you specify, and to protect you against wide swings or price gaps in the market, as well as helping you to manage your risk more effectively.
Stops can be particularly effective in protecting profits if you are long or short and the pair trips up when it hits your preset threshold level Stop orders are a simple way of limiting losses or taking advantage of upward trends.
Trailing stops automatically adjust their distance relative to market prices as these change. You extend their reach by selecting their trailing option on your deal ticket’s drop-down menu and specifying how far from current market price you would like it to move. Beware that stop and limit orders can entail fees or costs that are higher than those incurred from trading spreads and commissions on a market-by-market basis.
Create Your Own System
Forex risk management involves applying all rules and measures which are aimed at bringing the possible side effects due to unfavorable circumstances which can reduce your trading activities into acceptable and manageable levels. Though this requires self-discipline, forex risk management must be applied if losses should be checked as much as possible in this highly volatile sphere.
It really doesn’t matter what the underlying market is you trade: forex, equities or commodities, it makes no difference. Keep your risk management simple. Set yourself a sum of money that you can afford to lose, and that isn’t so large that it threatens your livelihood. Keep any losses small, so that you can then get back in the game immediately and make your money up.
All of these factors – your age, your level of experience, your financial targets, your knowledge of the market and your predictive ability – can impact the amount of risk you take on each trade with you. Using a risk management tool can help you to accurately measure these factors so that you’re able to be more successful as an investor – IG has several MT4 and MT5 risk management tools available that are designed to help traders across their journey in trading!
