“Am I ready to deal with the risk?” is a question that all novice traders should ask themselves before entering the FX market. When starting a forex trading business, we usually consider the possible profits, but we also need to consider the risk, since risk management is essential to being a successful trader. Due to inexperience and lack of information, the risk is increased for beginners. Demo account practice is therefore a crucial stage that you should never omit while learning. Since you won’t be risking any real money, you can learn more about the ins and outs of trading while staying safe.
But when you switch to a live account, you are exposed to market risk and risk management is vital for preserving your trading capital. In this guide, you will get to learn the key steps for managing the risk in forex trading.
1. Diversify your portfolio
We frequently hear about the significance of portfolio diversity when making investments in any kind of asset, but forex trading also requires the application of this strategy. First of all, keep in mind that the currency market can occasionally be very unpredictable and never utilize all of your money for forex trading alone. For a novice, it is advisable to start small and add more money later, once you have gained some practical trading experience. Additionally, you want to attempt trading using a variety of currency pairs, since concentrating on just one pair raises the danger and reduces your possible reward.
You can focus on one major pair in the initial phase of your trading journey, but you need to add more to the watch list after considering the correlation between different pairs. Another method for diversification is following two distinct strategies as you can rely on one strategy as a plan B if the first strategy fails to yield the expected results.
2. Find out the optimal trade size
Position sizing is a crucial component of risk management, and the lot size you select for a trade determines how much money you will need in the transaction. Your possible earnings as well as your possible losses in the event that you lose the transaction will be largely dependent on the magnitude of the trade. Large trading sizes boost profits but also carry a higher risk. Forex lots come in three different sizes: regular, mini, and micro. The largest and most popular lot size is the standard lot, but if you want to lower your risk, you can trade with mini or micro lots.
You can even open a micro trading account and trade with the smallest lot size until you feel ready to place bigger trades on a standard trading account. You can also rely on trading calculators to get accurate info on the best position size for your trades as they tell you the optimal lot size based on your account balance and the percentage of trading capital that you want to risk for a trade. This will help you with risk management in the most efficient manner.
3. Trade with a set risk/reward ratio and limit the risk per trade
The risk per trade and risk/reward ratio needs to be decided while figuring out the position size as the amount of profits you can earn from the trade should justify the amount of risk you are taking for that trade. Taking a lot of risk for a small amount of profit does not make any sense and it would be better to not enter such trades. You should also keep the risk per trade to 2% of the account balance or less as anything above 2% will lead to a bigger account drawdown.
Your risk/reward ratio should be greater than 1:1 in any situation and preferably 1:2 or 1:3. When the potential reward is higher than the risk, you can minimise the impact of losses and maximise the gains with every trade that you win. When you are looking for trading opportunities, you need to confirm that it is in line with the risk/reward ratio and decide the ideal position size considering the risk.
Read More: I will do godaddy website design, godaddy redesign, godaddy website seo, godaddy ecommerce
4. Measure total exposure to risk
When trading, one thing that you frequently overlook is the fact that every order you place exposes you to risk. You are taking a risk when you purchase a currency pair, and that risk is doubled when you sell the base currency afterwards. As a result, you must calculate the overall risk exposure. Because you will be selling it at a loss because you purchased it at a higher price if the base currency’s value declines before the sell order is placed.
Therefore, by calculating your overall exposure to risk, you should be prepared to manage the risk in the event that the price fluctuation does not work in your favor. It would be preferable to rely on knowledgeable traders to make trading judgments if you are unable to manage your risk exposure. To do this, you can invest in MAM/PAMM accounts, which are run by qualified forex traders and allow you to make passive gains.
5. Follow the trend
Following the trend and going in the same direction as the market is the easiest and safest technique for FX trading. When analyzing the charts, if you spot an uptrend, you should initiate a buy position to profit from the increase in price; if you detect a downtrend, shorting is the best course of action. The chance of losing money can be reduced by following a strong trend, and you should use technical indicators to validate the trend before making a trade. It is advisable to attempt to join a trend at the outset in order to take advantage of a favorable opening price.
6. Be careful with leverage
Without a doubt, leverage allows us to expand our accounts by maximizing the benefits while using a lesser initial investment. Leverage increases the trade size and, therefore, the potential profit margin. However, in the event that our calculations are incorrect, the losses will be equally significant, thus it is important to exercise caution when utilizing leverage in a trade. When using leverage in your trade, you should always figure out the required margin. If you don’t, a margin call could be issued due to a margin deficiency.
7. Always trade with a Stop Loss
In risk management, putting in a stop-loss order to minimize possible losses is the final but most crucial step. While losses are sometimes unavoidable, you may always manage them by placing a stop loss. However, it’s important to put your stop loss (SL) correctly because many traders place their SL too near to the entry price, which might cause them to abandon the market too soon during a quick drop.
Therefore, you must adhere to these 7 procedures in order to manage risk when trading forex. It will be simpler to manage risk after you determine how much of it you can take as a trader. This is necessary for a profitable trading endeavor. Learn more
Discover more from ugamasontech
Subscribe to get the latest posts sent to your email.
