Forex Trading Risks and How to Handle Them
Forex trading is an excellent way of earning income, but it bears risks you should learn to handle. Here is how.
Forex trading is fast and straightforward. However, if you want to be competitive and profitable in the Forex markets in the long run, it’s a process that takes time, dedication, determination, and patience. You can’t simply open a position in your trading platform without considering your Forex broker’s trading conditions, the market, leverage, liquidity, and counterparty risks, all of which affect your capital. You must also use methods and strategies to handle your money and risks; otherwise, you will be gambling rather than trading.
Money that you do not need
It may seem self-evident, but the first rule of Forex trading, or any other type of trading, is to only risk money you can afford to lose. Many traders, especially novices, disregard this rule because they believe it “won’t happen to them.”
You wouldn’t take all your money to the casino to gamble on black if trading were like gambling, would you? It’s the same with trading: don’t take needless chances with money you need to survive.
Stop-loss orders and limit orders
Stop-loss orders are used to get you out of a trade if the market shifts against you, effectively ‘stopping your loss.’ Stop-loss and limit orders should be used on any trade for three reasons.
Protecting the downside is just common sense. Your outlook has improved, and you can now leave your trading screen with the knowledge that you are protected to some extent.
Tolerance for risk
Before you begin Forex trading, you must first assess your risk tolerance, which is based on the following factors, for example: What is your age? Your understanding of foreign exchange trading, your knowledge and experience, investment objectives, and how much you’re willing to put in.
It’s not all about sleeping well at night or worrying less about currency fluctuations when you know your risk tolerance. It’s about understanding you’re in command of the situation, and you’re selling the appropriate amount of money concerning your financial situation and financial goals.
Keep your risk under control
You should also consider your risk per trade as a percentage of your trading capital and set it to a conservative level, particularly if you’re new to trading and are more likely to make mistakes than someone with more experience.
Just risk a small portion of your trading capital per transaction: a decent starting point is to risk no more than 1% of your available capital per trade. If you use sound RRR, you’ll be losing 1% in exchange for a possible return of 3%.
The effect of three different per-trade risk levels – 1%, 2%, and 10% – on a $100,000 account balance over a 30-trade losing streak is shown below. The trader who takes a 10% risk per transaction has lost 95.3 percent of their account balance, the trader who takes a 2% risk has lost 44.3 percent, and the trader who takes a 1% risk has lost 25.2 percent.
Forex trading is fast and straightforward. You must use methods and strategies to handle your money and the risks. Otherwise, you will be gambling rather than trading.
These pointers are just the beginning of a better risk management approach; as you dig deeper into your study, you’ll discover more Forex trading tools and techniques for beginners that you can use to enhance your trading strategy.
Try back-testing your trading strategy on a demo account before using a live trading account, and refine your strategy if necessary. Regularly review your trades with a trading journal to see what went well and where you can change. Accept responsibility for losses and learn from your mistakes. Always stick to your trading strategy, regardless of the timeframes you use or whether you depend on technical or fundamental research. Control your emotions and wait for confirmation of your trade setups before opening or closing a spot.