Risk management is an important skill that you can make the most of when trading with foreign currencies. The numbers show that roughly about 90% of forex trading beginners face losses early in their real-life trading journey.
A common mistake that most amateur traders make is that they do not focus enough on risk management.
It is not the right approach to believe that you should put all that you can afford to lose in a single trade since that kind of risk is something that a gambler would take. But remember that forex trading is not gambling and hence, if you wish to be a successful forex trader in the long run and get good returns, stop looking for that one jackpot trade.
What matters the most at the end of the day, is that your trading strategy is in sync with the risk management rules. Do bear in mind that these rules are in your best interest. They will protect you, guide you towards the right trade and boost your profitability.
Risk Tolerance
Risk tolerance is something that varies from trader to trader. Typically, you would come across trading instructors who would give you numbers like 1%, 2%, or up to 5% of the total value of your account that you may risk on every trade. But the onus is on you and how comfortable you are with risking that X percentage and a lot of it would depend on how experienced you are in the market. Obviously, amateur traders lack the knowledge and familiarity with trading as a whole and are also still getting the hang of a new system, so for them, it is wiser to opt for a smaller risk percentage.
Only after you get the hang of the system you’re using should you even consider increasing your percentage, but it is smart to remain cautious and avoid going too high. It is not uncommon that trading methodologies result in a string of losses, but the final goal of trading is to either reach the expected return or keep the accounts stable enough for the next trade.
Customized Contracts
The number of trading methodologies one can use is nearly infinite. Some methods would require you to use a particular stop loss and profit target on each trade you place while others function very differently. For example, suppose your strategy calls for a 20-pip stop loss on every trade and you deal only with EUR/USD, it won’t take you long to find out the number of contracts you might have to enter to be able to get your desired result. But in the case of the strategies that differ in terms of the size of stops or even the instrument traded, it can be hard to put a finger on how many contracts you’d need.
An easy way to realize how much money you can afford to risk on each trade is to customize your position sizes. A standard lot in a currency trade is equal to 100,000 units of currency, which represents $10/pip on the EUR/USD. So if the U.S. dollar (USD) is your base currency; a mini lot equals 10,000.
In the trading world, you have the flexibility to risk what you want, when you want, which could play an important role in determining your success rate in the long run.
Timing
It can be incredibly frustrating to miss a potentially successful trade simply due to your unavailability when the opportunity surfaced. Since the forex market operates round the clock, this could happen often and can especially affect you if you trade smaller time frame charts. Buying or creating an automated trading robot could solve the problem, but a number of traders remain skeptical of the technology/source or are not in favor of giving up control.
This essentially means that your availability is paramount to placing trades when opportunities arise. Setting the alarm for 3 am to place a trade might not make the cut unless you can function on 2-3 hours of sleep. Hence, retail traders should be a bit thoughtful about the time they are willing to give trading. Probably 4-Hour, 8-Hour, or daily charts would suit the lifestyle where time is the most valuable component.
Stop-orders
Another useful way to mitigate your risk when you’re away from your computer is to have trailing stop orders in place. Trailing stops could be an important part of any trading strategy. Trades could gain value if the market moves are favorable but the trade would close by default if the market price suddenly moves in the opposite direction.
Be Updated With the News
Stay on top of the latest news if you’re trying to manage your risks.
Keep It Affordable
Here is the golden rule of trading–never invest more than you can afford to lose. Trading can be hard and is of course risky. If you do not wish to gamble away the money you’ve earned from your own hard work, invest it smartly.
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