As any other investment, you always stand a chance to lose money. Nothing is a guaranteed win when investing or event trading. Especially when trading forex where you face constant risk as the forex market is very lively compared to that of commodities.
Some would say that the difference between new and experienced traders are the type of strategies they use when trading currency pairs. This might be true but risk management plays just as big or even bigger role than strategies. A lot of inexperienced traders get very emotionally involved when trading, this can lead to them developing a gambling instinct.
They will recognize the chance to make a huge amount of profit within seconds and as a result of this their investment might be at risk due to a rash or hasty trade decisions. This has even led traders to neglect a proper trade strategy and trade only according to a normal trend indicator. They’ll see the market is in an upwards direction and immediately buy.
Watch your Capital Positions
It’s also extremely important to always know how much capital you have available in your account. Never open trades that have a potential loss that your capital can’t cover. You should always plan for a losing trade. This is a key factor in risk management because if you do lose the trade you should still be able to have capital left to enter the market again, given the right opportunity.
The one rule that applies to this, is the “Reward should always be bigger than the risk” rule. At all times your potential profit should be twice or even more than the potential loss. This is the only way to grow your invested capital through trading.
Stop losses and take profits also have their part to play in risk management. This target marks hep the trader maintain control over his trade. The stop loss has the important function to prevent your losses from exceding the limit as to what your capital can cover. If your trade is moving too much in the opposite direction and it reaches your stop loss, the trade will automatically close.
Somtimes it could also help if you are using forex trading signals to place the stop losses in positions that are close to the stops. This means that you can be effective and identify the best entry and exit points while keeping it risk controlled.
The take profit has a similar function, if a swing in the market is approaching traders can’t always predict how high or low the market will move, so take profits close also on their own once your trade has reached the mark and profit has been made. Without take profits, traders sometimes miss the spike and miss out on making any profit.
Place Regular Stop Losses and Take Profits
A smart risk managing way to use stop losses and take profits is by adjusting them as your take profit is reached. Once the trade has reached your profit, instead of closing the trade your take profit moves to the next possible point that will reward a bigger profit. So will the stop-loss shift as well, it will still be a loss but not that big of a loss as the first one. When placing a stop loss or take profit, maintain the mindset of reward should be bigger than risk.
Avoid leverage as well. “Leverage is the use of the bank’s or broker’s money rather than the strict use of your own.” With leverage, traders can invest $1,000 yet trade for $100,000, this will be indicated as 100:1. The reward for trading with high leverage is enormous, but be warned that one bad trade can clean out your entire account leaving you with no capital.
Inexperience traders lose their whole investment due to not understanding leverage, they think they can only lose $10 with a 100:1 trade, yet they will actually be losing $1,000 and not just $10.
Luckily risk management can be done with the right research and enough knowledge. And as long as you eliminate your emotions and keep a level mind then potential risks will be easier to identify.