Tools and Techniques to Manage Risk in Forex

Forex is a market which attracts not only experienced traders but a lot of beginners as well. Majority of them find trading as a possibility to gain easy extra money. You can indeed earn much, but you have to remember that there is a risk of losing your capital.

Being a successful trader takes a lot of patience, time, dedication, and knowledge. Having a good strategy is essential, but at the same time, you have to be ready for the times when not everything goes as planned. Applying proper tools and techniques to manage the risk you take is the most critical skill that every trader should have. If you can make the most profitable decisions, you’ll undoubtedly profit from trading, however, knowing how to minimize the risks will let you benefit even more.

Many beginning traders make the most common mistake – they can’t forgo, and keep their money for too long in a losing investment hoping that the market will turn around, and they can get back the lost money. Knowing when to let go is a must for every trader. Learn from the best traders, and read, what are their tested ways of managing risk in Forex.

 

Only risk money that you can Afford to Lose 

It sounds like a no-brainer, but many people still make this mistake. Beginners, who are not aware of the importance of proper capital management, tend to invest more funds than they are comfortable with. As a result, they’re getting too emotionally invested, and potential losses drive them to make more bad decisions. In the end, their trading is not investing, but rather gambling.

If you believe that “it won’t happen to you” don’t bother trading at all. Even if you win some money at first, in the long run, you’ll lose. And losing has a harmful psychological impact on decision making. So, do yourself a favour, and avoid taking unnecessary risks. Learn from the mistakes of other people, and don’t add extra pressure on yourself. It’s better to earn less, with reduced risk, than put all your eggs in one basket, and lose everything.

 

Find the Right Broker

Pick a good broker, who will help you to manage the investments. Brokers are professionals, and they spent their life on Forex. They know how to invest, and when to do it, in order to maximize the profits. Try to find a platform that will best fit your needs. What do you care the most about? Low commissions? Fund selection? Or maybe the features that they offer, for example, investment educational materials that will help you become a better trader? If you don’t know how to find a good broker, use platforms such as Engine Forex. That will make the selection process much easier for you.

 

Get familiar with leverage, the risks and benefits that it can bring

If you’re interested in Forex, you’ve probably stumbled upon the “Leverage” term. It’s the ratio of your funds to the size of the broker’s credit. So, it’s like borrowing a broker’s capital, in order to increase potential profits. Leverage size depends on your agreement conditions, but usually, it doesn’t exceed your invested capital for more than several times. It’s an excellent opportunity to win more because you can trade with much more funds than your initial capital. What happens when your investment turns out to be a dud? In this case, you lose more as well, and a few bad investments will severely hurt your pocket. Forex traders often use high leverage to profit significantly, but changes in the market happen quickly, and it’s undoubtedly riskier than working with your own money only.

 

Risk per Trade

Let’s say that your initial capital is $1000. You should never invest more than 2% of your total balance. It sometimes happens that you’ll invest and lose. It’s essential to know how to deal with losing streaks, as they will happen, no matter how experienced you are. Risk per trade rule allows you to survive these bad times, and keep the capital big enough to recover from losses relatively quickly.

 

Establish and stick to a certain risk level

One of the mistakes that almost every Forex trader did is becoming overconfident. Let’s assume that you recently earned a lot of money, and all the investments that you’ve made turned out to be profitable. Some people think that now, they’re experienced enough to raise the stakes. It’s wrong thinking. You should always plan your actions and stick to the plan you’ve made. Only when you earn a certain amount of money, you can think of increasing the size of your positions.

As you can see, risk management in Forex trading is not that complicated, but it would be a big exaggeration to say it’s easy. Even though the rules are simple, it requires a lot of perseverance, patience, and knowledge to become a responsible trader. Once you become one, you’ll significantly increase your chances to earn on Forex trading.

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