7 tips for risk management

A lot of people believe that forex trading is like gambling in many ways. And it is only untrue if one’s trading according to a plan or strategy with the proper risk management measures in place.

Trying to make big money off of one trade or entering positions without any research is trading like gambling because the trader is hoping to just ‘get lucky’.

To avoid entering this kind of mindset, because there will most likely be a lot of loss this way, the first step any trader needs to take is to set a risk management strategy.

Given below are 7 tips and measures every beginner should be taking. We say beginner because every seasoned trader is already following them.

1 Investment in Forex should only constitute a part of your portfolio

This is a measure that needs to be taken before you even step into the market. While there are ways to trade safely and minimize losses, it is not recommended at all to invest all your savings into this market. So use forex to diversify your portfolio. Don’t put all your money into it.

In forex terms, this is the trade capital that you will start your account with. So reserve only a part of your savings for the trade capital, the part that you don’t mind losing.

2 Figure out the lot size that suits you best

As a beginner when one sees a lot of people going for the standard lot, one might start assuming that it is the way to go and the rest are used only as anomalies. This is not the case. It depends on what stage of trading one is on.

For beginners it is recommended to trade smaller lots because it is a time of learning and smaller lots means smaller losses, should the market move against the trader.

One way of ensuring safe lot sizes is to set a risk limit for your account. The recommended limit is 1%. So when entering a trade you will need to pick a lot size that puts at risk only 1% of your overall trade capital.

3 Stick to what you decide

So if you’ve decided to risk only 1% per trade, stick to it. It is easy to get carried away by some wins, but that is exactly why a lot of traders end up losing more than they can afford to lose. The only way to ensure that this doesn’t happen to you is to stick to the risk/reward you decided upon and follow it like you would follow a rule.

The key to trading and earning continuous profits is to trade with discipline. You will find that all successful traders have their own systems and rules in place which they follow to the dot. If you want the kind of profits they are earning, you need to practice the same kind of discipline.

4 Measure total exposure

If a trader buys one currency, and through another pair sells the same, that currency has been exposed twice. If the first situation goes against them they will be selling the currency cheaper than they bought it. In the second scenario they will be buying it back for more of the other currency than they got initially.

This situation will arise if one is trading two or more pairs with one constant currency in every pair while the others are variables.

Don’t expose too much of your primary currency at one time.

5 Move with the trend

In forex, there is no one mighty party in control since it is an OTC market and this may make one assume that with enough trying everyone can pull the market in their favor. It is usually not the case.

When there is a sharp rise or a sharp fall in price, it is a strong bullish or bearish movement in the market that is causing it. One trader cannot fight it. So instead of staying hopeful when there’s no reason to be and fighting the trend, it is better sometimes to make adjustments accordingly.

6 Understand how leverage works

When using leverage one should always remember that while it can help magnify profits, it can also do the same for losses.

If one takes too big a leverage it would raise the value per pip of the currency pair. In the end, the trader’s concern should be the account balance. If there’s a loss how big of a blow does your account get?Don’t leverage 200:1 just because you can.

It might seem promising to think that if you make such and such profit it would double your trade capital, but you have to keep the other side of the coin in mind as well. If you end up making that big a loss, it will cost you your entire account.

7 Use Stop Loss

This is risk management 101 and we hope yours is already in place. Stop loss is an order to ensure that should the market move against the trader, they will not lose too much.

It is a very useful method to limit losses. It is how one’s plan for risk per trade is brought to fruition. Sometimes traders also use a mental stop. So they don’t actually physically set their stop, they just know that if the price should fall/rise to this level they will exit. This is only recommended if you know you have the willpower to see it through.

These are some of the basic things new traders should keep in mind. Even if you’ve been trading for a long time, you can look at this as a refresher for you to check that you’re doing all this.

At the end of the day, forex trading is just like any other work. It is not a lottery ticket nor is it a get rich quick scheme of some kind. One has to put in the hours, the study, and the planning to earn money off of it. And risk management is the first step.