As we always emphasize, risk management is a vital part of forex trading. By applying risk control methods, every trader can increase the profitability of their trading. And can minimize and prevent losses.
It is generally based on four main factors. How quickly you react to the formation of reverse movements. Your analytical approach to predict the risk in transactions. Knowing the difference between reasonable and unacceptable risks. Adapting a clear action plan to eliminate unjustified risks.
Some rules to follow to minimize the risk in transactions.
1) When you are in doubt, don’t go with the market.
Any doubt indicates that the action plan is not the best one. If the market goes beyond your forecasts, it’s better to get out of it. Then only, you can minimize the losses.
2) Manage your emotions
The inability to control your emotions would make you a loser. Well-balanced emotions and good composure are essential for forex trading. If you feel out of self-control better, get out out of the trade temporarily. Then, having conversations with other traders would help you a lot.
3) Go for less
Don’t spread your concentration in many directions. It’s a reality that traders who concentrate on single transactions display more efficiency in executing their skills. The transactions that you execute after much preparation face low risks. So, doing less number of trades is advisable, and you pay less commission also.
4) Be defensive
Even at the start of your trading, expect the unexpected to happen. And always be ready to protect your transactions from losses. Calculate the maximum limit and use ‘stops.’ Plan for a safe exit and exit at the right time.
5) Go with the trend
Study the market and don’t try to control it. Going with the trend is one of the ways to minimize risks. If a trend reverses, reduce the size of the risks by the available methods. In these cases, even damages add to your experience in the market.
6) Use Stop loss and Take profit
Forex is a game of prediction, but it’s not a gamble. But no strategy exists, which brings only profits. Hence, every trader should learn to use stop-loss as a protective cover. The use of SL and TP is important in minimizing your risks. If you can set them correctly you could escape with minimum losses at the initial stage of the negative movement. It’s also helpful to tackle the trader’s uncertainty.
7) Diversify your capital
Forex trading can generate good profits. But the market is a volatile one and there is always uncertainty. So, it’s always safe to not put all of or most of your money in a trading account. Always keep a reserve fund and float only a part of your capital. Roughly, using 5% of your capital for one position is advisable in trading.
8) Follow a trading system
Having your own trading system gives you the ability to control your risks. You can go for your own systematic trading based on forecasting and your analytics. Your strategy can be a set of rules and parameters which are clearly defined. It helps you to open a transaction. And you can make it suitable for you to match your trading time, the indicators you use, and the risk level.
9) Avoid technical failures
Though it doesn’t occur very often, there is a possibility for technical failures. In Order to avoid it, it is better to avoid the use of a physical computer for it. Prefer using a remote server with permanent access. It’s a better option to avoid technical failures.
10) Choose the right broker
In the forex market, there exist a lot of scam brokers. And most of the traders would face them in the early stages of the career. They pose a legitimate intermediary company and deceive the people who are willing to make money in the financial markets. So, when you choose a broker you should check all data to ascertain its reputation.
If you know the essentials of forex trading and apply are risk management techniques forex trading is not a tough job to do. Though the percentage of people who succeed in forex trading is low, they are the people who adapt the right forex techniques. So, learn and apply the right risk management techniques and be successful in your trading.