December 5, 2022

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Risk Management in Forex Trading

Risk Management in Forex Trading - 1000Pip Builder

Out of every 100 individuals starting Forex trading today, 90 will fail, lose their trading capital, and quit it forever. This is not any imagination. It is the actual situation with most retail Forex traders. It is sad that this is what becomes of those individuals despite the fiery desire to make money that they bring to the trade. But why is it so? There are some explanations.

Risk Management in Forex Trading.

First, most traders hardly take the time to learn how to actually analyse the Forex market before they take their first trades. So, they lose. For others, however, they are luckier: beginner’s luck smiles on them so they have profitable first trades. In fact, they might even go ahead to record more wins – despite not having logical and technical reasons for taking the trades they take. So, they tend to think it will continue for them like that.

However, that is not a sustainable way to trade. So, eventually, they usually meet their waterloo. Beyond the lack of technical knowledge is also the brazen disregard for risk management found to be peculiar to many of those traders that fail.

Thus, it might be safe to conclude that if you really want to succeed as a Forex trader, you must learn how to trade and manage those risks associated with the business itself. Here, you will learn the latter. 

  • Trade only with an amount you can afford to lose

    Actually, this should be obvious. In any form of trading whatsoever, the standard recommendation is that you should invest only amounts you can afford to lose. Although for greater gains, trading with a substantial capital size is advised. In fact, it is the best. However, whether your trading capital is small or large, it is important that it is an amount you can afford to lose.

    That is also why you should not borrow money to trade. Trading with amounts you can’t afford to lose or with borrowed money will only put a lot of pressure on you. You would not want to lose. Yet, in the course of obsessively trying to avoid mistakes, you are more likely to make them and lose. The Forex market is unpredictable. So, trade only with amounts you can afford to lose!
  • Evaluate your risk profile

    Before trading Forex, you should have an idea of your risk profile. You can do this by asking yourself important questions such as your age, levels of experience and knowledge, and your investment goals. Based on these factors, you will be able to devise a strategy that will be most appropriate for you.

    Using an appropriate strategy is a worthy risk management tool as a Forex trader. Apart from giving you a coherent approach to taking on the market, a healthy, comprehensive trading strategy will empower you with risk management tactics. Since it will stipulate the specific conditions that have to be met before you either buy or sell, it will enable you to make better and more disciplined decisions.

    With those smart, more-informed decisions will come adequate risk management.
  • Do not overleverage

    Forex trading has become increasingly popular in recent years because more and more individuals are perceiving it to be highly lucrative. This lucrativeness is occasioned by the possibility of abundant use of leverage that is available to Forex traders. Indeed, leverage is an amazing tool that can enhance the profitability of your trading career.

    Sadly, however, it can also wreck it. Why? Because it is a double-edged sword that can help improve your profitability when reasonably used or make you into a fatal loss when not so. Hence, to manage your Forex risks, stop over-leveraging your trades. Instead, start using it only sparingly.

    While, of course, many brokers offer leverage as high as 1:1000, no Forex professional will recommend the use of such ridiculously high leverage. in situations of unexpected market moves, the consequences will be damning and substantial losses will result. Indeed, the use of high leverage is never a good idea.

    So, instead, always be conservative with leverage. 1:100 leverage is really enough.
  • Be patient

    Especially by newbies, it is easy to think that Forex trading is a quick way to riches. Instead, the reality, in fact, is that it can rather be an easy way to rags. Succeeding as a Forex trader requires time, dedication, effort, and patience. However, it is the former mindset that usually propels many of its traders to take unnecessary risks.

    When you think Forex is an easy way to riches, you would not be taking the necessary precautions. You would not invest only an amount you can afford to lose. You would not use a stop-loss on your trades and correspondingly, you would not be using a reasonable risk-reward ratio. And most importantly, you would also not be following your trading plan!

    To manage Forex trading risks, you have to be patient. You have to stick to your trading plan. That you made a couple of consecutive winning trades does not mean that you will keep winning. Do not revel so much in your wins that you start throwing all caution to the wind. Succeeding in Forex requires patience. So, do not rush it.

Conclusion

Forex trading is risky. However, that should not get you scared. With sound risk management principles discussed here, you can fight off those risks to go ahead and succeed. Do not invest an amount you cannot afford to lose. Evaluate your risk profile. Do not over-leverage.

Finally, be patient. One more effective way to manage your Forex trading risks is to use Forex signals. Importantly, in using them, to achieve your aim, just make sure that the signals can be relied upon.