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Forex Trading and Risk Management. What You Need to Know

Posted May 22, 2018 by Sue Prichard

It’s no secret that the foreign exchange market is a highly competitive field. If you wish to succeed, you must always aim towards impeccable strategy. Being able to minimize losses and maximize profits is an integral part of that. Here is everything you need to know about forex trading and risk management.

The Importance of Risk Management

To better understand the fine art of trading on the foreign exchange market, it’s essential to know how to manage risks. Forex seminars are a great starting point for your educational journey on the topic. Nevertheless, you must also do your due diligence and possess at least a basic understanding of the concept.

Forex risk management refers to carefully calculating the jeopardies involved in your day to day activities on the eponymous market. It is essential for turning a profit because it ensures that your actions are planned and accounted for. Although it is impossible to be accurate one hundred percent of the time, it is still a viable way to minimize losses.

Many brokers promote the ‘no risks, no wins’ approach, which creates an unhealthy desire to go all in on the part of traders. In reality, it’s best to stay in control and know when to get out. Thus, regardless of whether you engage in forex trading as a way to earn some extra money or pursue it full-time, managing risks is essential.

A valuable first step in learning how to do this is to make good use of the demo account feature that your trading platform puts at your disposal. By registering for one, you can try out your strategies and see exactly what works and what doesn’t. This will help you establish the appropriate course of action in the future.

When you resort to demos, it means that the trades you are engaging in are simulated and based on real-time market data. As a consequence, there are zero risks involved. But when you’re playing for real money, things will be different. After all, proper risk management can be applied when there are actual dangers to account for.

How to Approach It

Naturally, minimizing losses and turning the ideal profit is every trader’s main objective while on the forex floor. The only way to achieve that is through proper risk management. According to The Balance, this side of the strategy can be approached in multiple ways. The main method consists of controlling your misgivings.

Simply put, you need to know when to cut your losses. Of course, this is easier said than done. You can use either a mental stop or a hard stop to do it. The former refers to setting a limit for the drawdown or pressure you are willing to take for your position. The latter has to do with setting a stop loss as you initiate the trade.

For beginner traders, hard stops work best. However, where you decide to set the stop loss beforehand is a fine art. There isn’t a fixed formula for this. Instead, rely on your knowledge of the current context on the market to determine a position that is risky enough to be profitable, yet not so dangerous that you might lose it all in one move.

Using smaller lot sizes is also advisable for beginners that are looking to manage and minimize perils on the forex floor. The bold and brave advertising most brokers put up would have you believe otherwise, but in reality, it’s better not to aim for doubling your money off the bat. Take it slow and learn as you progress.

Finally, tracking the overall level of exposure your lots are getting is also recommended. You need to keep tabs on what you have open and consider wisely before placing two on the same currency. For example, if you choose to go short on the classic EUR/USD trade, but then go long on USD/CHF, you will be in trouble if the U.S. dollar shifts.

Keep in mind that the market is sometimes illogical and choppy. Not even the best in the game can always predict what is going to happen next. Thus, when the worst happens, take it as a lesson and know what to avoid the next time around. In addition, always keep some spare capital on the side for a rainy day. You won’t regret it.

The Bottom Line

If you want to be a successful forex trader, then you need to know how to properly manage risks. Testing them with a demo account on a trading platform is only the first step. Once you invest real money, you need to know how to control your deficits, reduce lot size and track exposure. By doing this, the success rate of orders is bound to improve.

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