If you are trading Forex, or interested in doing so, it will pay you to put some specific focus on the subject of "risk" and learn some risk management strategies. Controlling Forex risk is one of the most important ingredients of successful trading. The amazing, but sad truth is that most traders fail to truly make their forex trading a business, rather than a gamble, because they don't apply basic Forex risk management principles. There really are ways to reduce your exposure to Forex risk and we'll examine some of them below in more detail.
The Forex market behaves differently from other markets, so in addition to common sense, universal techniques, you want to also find strategies that pertain specifically to currency trading.
First, let us look at the highest level principles that you absolutely must follow:
Only surplus funds should be placed at risk and anyone who does not have such funds should not participate in trading foreign currencies, period, end of story, no exceptions.
You should be aware of all the risks associated with forex trading and make an informed decision after consulting with your financial advisor and considering your own financial situation and objectives. There is significant risk in every foreign exchange trade, and a discussion with your financial advisor is a good and necessary idea so you can set the outlines and boundaries of just how much capital you will and will not apply to this activity.
Just like any other speculative business, increased risk entails chances for a higher profit or loss. But let us restate that. The chances for a higher profit/loss inherently entails higher risk. You can reduce that risk by limiting the "leverage" or position size you trade for a given account size. Manage your risk/reward ratio responsibly and don't go for the maximum.
Another time-worn, but true principle is to always cut your losses. You must be set up to automatically exit losing trades before losses exceed your pre-determined maximum tolerance.
Now let us take a look at some top ways to reduce risk in Forex trading:
1. As mentioned above, reduce your risk by reducing your leverage. Do not use the maximum amount of leverage available to you. Just because it is available to you, you don't need to leverage yourself at 100, or even 200 times. That's clearly the easiest way to lose all of your deposit in a flash when the market makes a single, quick fluctuation.
2. As mentioned above, you must use always use a stop loss. Set the stop loss in alignment with your pre-determined maximum loss tolerance per trade, and leep it steady. Don't defeat its purpose by adjusting it after the trade is placed. If you need to adjust it, do so in subsequent trades.
3. As a general principle, diversification is a common sense and obvious risk mitigator. While it's easy to understand how to diversify an entire investment portfolio, how does diversification apply to Forex? One risk mitigation strategy would be to make it a rule to trade in more than a single currency pair.
4. In an implied comic reference to the movie "The Godfather," Kramer said to Jerry in a Seinfeld episode, "Never go against the Family, Jerry..." In Forex trading, let's make that, "Never go against the trend.." Life is really a lot easier with your back to the wind. Of course, that means you have to be able to see and assess the trend, which is covered in the next point.
5. Use software designed to help you. Since successful trading depends good timing, using technical analysis and other real time software to show or clarify for you things that are going on can provide you with signals and other trend information that can help you make a better decision. In a way, it's like having night vision goggles to help illuminate the darkness. Of course you need to expect that no aid, device, strategy or plan can always be right 100% of the time, but it is always better to drive with your eyes open and in the light, than closed or in complete darkness. You can search and find a number of packages and services on the internet and you should try and compare some of them while using trial forex accounts in real time where you risk no real money to find one or more that help, or seems to work the best for you.
6. Never stop trying to learn. Study how the Forex market works, and keep a keen eye out for risk management advice based on the experience of others. To learn only through your own experience and trial and error would be the riskiest and most costly way of doing things. And then, even when you are successful, you can't rest on your laurels, lest you fail to understand the true source of your success so that you can repeat it reliably. Keep researching, learning and trial-testing what you read from others.
