Risk management strategies when trading forex

Anyone who pursues forex trading should know that there is no guarantee of success, as how much money you can make depends on several elements. These include your risk appetite, knowledge and understanding of the forex and financial markets, how much time you dedicate to trading, as well as the funds you have at your disposal to invest in forex trading. That being said, there have been many success stories of people who have managed to turn their lives around because of forex trading, but one should always be mindful of the fact that you could potentially lose your investment if you do not know how to effectively manage risk when trading currencies.

Risk management strategies

As a starting point, one way of reducing your chances of being scammed is to use safe US forex platforms for trading that are widely recognised across the globe. If you choose to use an unknown platform with no real track record or credibility, it increases the risk of you not truly capitalising on potentially lucrative market fluctuations. However, it is worth noting that there will always be risk associated with such an endeavour, as investments offer chances of both losses and considerable returns.     

Strategies to manage risk when trading

Novice traders may still be quite intimated by the thought of trading and the potential losses that they could face, but with time and dedication, they could get better at it. It is advised to not just open any position without first noting the trading conditions set by your chosen broker, market conditions and the performance of your currencies of interest, amongst other factors. To better manage forex trading risk, you should:

Use stop-loss and limit orders

These are defined as instructions to your broker to place a trade when the price hits a certain level. Stop-losses are placed on an open position to ensure that you get out of a trade is the market moves against you. This provides a level of reassurance and comfort to you because you know that your potential losses won’t exceed a certain point.

Set your risk/reward ratio at a minimum of 1:2

A risk/reward ratio (RRR) measures and compared the distance between your entry point and your stop-loss and take profit orders. Those who maintain a short-term position, such as scalpers and day traders, are advised to have a minimum RRR of 1:2, while longer-term traders should aim for 1:3.

Keep your risk consistent

It is widely said that once some people start making some sort of profit, they become more confident and tend to increase the size of their positions. This is strongly advised against as it puts you at an increased risk of losing your investment. When you start trading, your strategy should have guidelines on the effective sizes of your positions, which you are advised to adhere to. Making a few profitable trades should not make you less risk averse, as unexpectedly changing your strategy could be damaging in the long-run. When it comes to trading, your strategy should not be easily swayed by fleeting elements, as it was created based on hours of research and analytical data, one would assume.

Leave a Reply