Forex Strategies for Risk Management That Will Tell You When and How to Walk Away
Forex traders should keep an eye on various things to limit their risks related to trading. Many traders just follow trends rather than paying attention to managing their money adequately. Consequently, you will lose your hard-earned money unnecessarily. The two major reasons why forex traders lose their money are an improper use of stop losses and large trading positions which traders hold for too long. Improper use of stop losses is specifically worrisome for novice traders who arenât able to plan long-term strategies.
If you wish to be a better and more proficient forex trader, here are the risk management strategies you must follow.
- Stand By Your Stop-Loss:
You must never enter the trade with only keeping profits in mind. Calculating your protective stop-loss is also vital. You need to come up with an achievable risk-to-reward ratio that will help to limit your trades and select a suitable stop-loss level.
In simple words, a stop-loss refers to limiting your losses by setting the order a definite number of pips away from the entry point.Â
- Take Profits For Protecting Your Portfolio:
If you want to pursue profits in forex trading, ensure that you keep your emotion at the door. Have a predetermined exit strategy in place so you donât let your feelings and emotions hinder your decision-making. It will also ensure that you donât indulge in impulsive trading. Itâs worth mentioning that logic and discipline are the two most crucial things that you must have to emerge as a winner in trading and maximize your profits. Furthermore, have a trading plan in place and be strict with it patiently. All these tips will help you protect your portfolio at all costs.
- Choose Your Position Size Smartly:
In simple and straightforward words, size matters a lot in forex trading. This means a significantly bigger position size is riskier. And having such high risks too soon will wipe out your entire capital in no time, especially if you are using high leverage. This is why it is recommended to give only a small proportion (1%-2%) of the total account value per trade.
Select your position size carefully after giving it some due thought. Thus, take some time to prepare and compute it to determine the exact time for the recovery to take place if you are going for a bigger risk.
- Accept The Fact That Losing Can Happen:
Despite what others tell you, forex trading is more of a marathon than a scoot. Thus, there will be times when you are going to lose both mentally and financially. Donât get discouraged if you witness losses for a consecutive time period. Losses come and go in trading, and you should readily accept this fact if you donât wish to be vulnerable to impulsive trading.
- Donât Let Fear Take Over:
As mentioned before, you have to be highly disciplined if you want to make it big in the forex market. But there are times when even the most disciplined traders tend to get emotional if they have undergone unexpected losses. When such a situation happens, they tend to trade again and again to set off the losses. This is impulsive, and the consequences can be severe.
Take a deep breath, let everything sink in and donât be afraid of the loss. Trading is a game of numbers, and losses are bound to happen. Always keep your focus on the big picture, and donât deviate from your trading plan at any cost.
- Be Alert:
Always keep one thing in mind, you are always in learning mode while trading because the market is highly unpredictable. Things will go out of the way every now and then. All you can do is learn, learn and learn from your mistakes. Keep your knowledge updated about all the economic and financial matters so that you know whatâs going on in the economy and how it will affect your money.Â
After some time, traders stop learning, and this is where the problem starts. The lack of attention is the major reason for higher trading risks. Thus, be aware of the major happenings and their effects on your trading portfolio.