Best Strategies To Manage Your Risk & Succeed In Forex Trading
Trading is all about managing risk. If a trader is able to manage his risk, then making profits won’t be that difficult. Hundreds of candles are formed on the chart, and you as a trader just need to pick 4-5 candles to be profitable, rest is all risk management. The key to success is identifying the opportunities ideal for your trading style and executing the trades with perfection. However, you should be prepared to encounter losses as the possibility of an unfavourable price movement is always there. These losses should be kept under control to preserve your trading capital.
After all, we pursue trading to make more money and not to lose what we already have. Still, losses are part of the trading journey and you cannot separate the risk from the process. The best way to minimise the losses is to learn how to manage the risk without limiting your profit potential.
You will get to learn the best risk management strategies in this blog, so make sure you read till the end.
Practice Trading Without Risk Until You Master Risk Management
The first strategy I’d like to talk about needs to be followed by all beginners stepping into the forex market. It does take time to educate yourself about the dynamic market and you cannot gain practical knowledge without watching the market movements yourself. But you should not take any kind of risk in this phase as you haven’t learned and won’t be able to deal with it. Thus, you have to practise trading without risk by opening a demo account that is funded with virtual currency instead of actual money. You will get the feel of trading on a real account with real-time market data and the results you get in demo trading help you to understand the market risk better without being exposed to it. As for the platform suitable for demo trading, MT4 seems to be the most popular choice due to its simple UI and useful trading tools. Traders can get the MT4 trading application from their broker’s website free of cost.
Intricacies of Forex Trading
Trading is a process in which we buy at a low price and sell at a higher to make profits. However, the scope of forex trading is wider as it allows you to find trading opportunities in any type of market situation. When you are trading a pair in anticipation of a price rise, you open a long position. You can also trade pairs when the price is falling, which is called shorting the pair. When you go long on a pair, you buy the base currency but while going short, you sell the base currency and buy the quote currency which is going to gain value against the first one. When it comes to trading styles, you will find scalping, day trading, swing and position trading.
Also, not all traders will be focused on the value of currencies or price fluctuations in the forex market. Some people make profits from the interest rate differential of currencies in a pair through carry trading which is a different approach to traditional trading practices. This flexibility of forex trading makes it more attractive as you can make profits in uptrends and downtrends alike. This uniqueness of the currency market gives you the freedom to take any position based on careful analysis of the market. This can be technical or fundamental or a combination of both. Thus, all types of traders get a fair chance in the forex market and all you have to do is prioritise risk management.
Understanding Account Balance and Equity
Many beginners get confused when they read the terms account balance and equity. Account balance is the amount of funds in your forex account and this will be your trading capital. This includes both your deposit and profits from the trades you won if you haven’t withdrawn it yet. Equity, on the other hand, includes the unrealised profits & losses from the trades that are currently open or running. This is the total valuation of your account. Once you close all the open trades, the profits will get credited and losses will be limited making a change in your account balance.
You need to understand the difference between account balance and equity to come up with a sound risk management plan. In forex trading, you can also enter bigger trades with a smaller amount of capital by using leverage. You just need enough capital to meet the margin requirement and the broker will increase your trade size. This boosts your profit potential but also increases the risk. When it comes to taking calculated risks, trading calculators are reliable tools. A comprehensive tool that gives accurate values right away can save you from making costly mistakes in trading.
Now, let’s have a look at some simple yet powerful strategies to manage your risks along with a brief description.
- Devise A Personalised Trading Plan – Your trading plan should be tailored to suit your requirements and trading goals. It should be rule-based and logical. The trading plan should be clear and precise leaving no room for confusion.
- Determining Your Risk Tolerance – This is the amount of risk you can take without stressing yourself out. The risk you should take should not threaten your financial security.
- Perfect Position Sizing – The size of your trade position should be optimal as the risk per trade depends on the trade size in lots. The risk per trade should not be more than 1% or 2% of your account balance as it leads to bigger losses.
- Currency Pair Selection – You should select suitable currency pairs based on the level of liquidity and volatility. You can diversify by trading multiple pairs but currency correlation should be considered. Major pairs are best to minimise the risk.
- Place Stop Loss Orders – No matter how promising a trade looks, losses can happen in the blink of an eye. Make sure to place a stop loss in all your trades to avoid bigger losses. Always keep in mind to give small SL to the market and take large profits from the market. Beginners often do the opposite and then, leave the market saying that it’s all a scam.
- Utilise Take Profit / Trailing Stop Loss orders – Risk management is not just about limiting the losses but it is also about preserving the profits of a trade. Both Take profit and trailing stop loss orders are used for securing your unrealised profits.
- Build Trading Discipline – Lack of discipline increases the risk in trading as you often deviate from your original trading plan and make hasty decisions in the heat of the moment. You can avoid such mistakes by following a disciplined approach.
- Continuous Learning and Improvement – The forex market is ever-changing and continuous learning is important to withstand the test of time. You should keep yourself updated and strive for improvement to avoid the risk of being left behind.
Conclusion
With that, you have learned some valuable information about the risks in forex trading and the best ways to manage them. But there are more things that you have to learn to master risk management. So, take your time to prepare
