The Foreign Exchange Market is extremely volatile, and it’s impossible for day traders to accurately gauge the future direction of the markets. That’s why forex trading can be so high-risk. But fortunately, day traders can and should take steps to minimize their risk.
How is it done? First, it pays for beginning traders to learn the markets, develop a sound strategy and trade slowly as they dive into forex trading. That sets a solid foundation for day-to-day trading. But beyond that, there are other critical steps traders must take to minimize their forex risk. Here are a few ideas:
Manage Your Expectations
Day trading is sometimes wildly hyped, and beginners can get misled to believe forex trading is a “get rich quick” endeavor. That couldn’t be further from the truth. It’s highly unlikely that a beginner forex trader will turn a $500 initial account balance into $100,000 in a matter of months.
In other words, don’t let the promise of massive profits blind you from the risk. To avoid getting blinded by potential, set reasonable goals. Then, develop a strategy that will enable you to achieve those goals reasonably.
Develop Trading Discipline
Discipline is a skill that must be continually honed, and that’s true for everyone from beginners to master forex traders. When first trading, you can begin learning it by focusing your attention on a single currency pair. Pick one and master it. Learn how you can trade around it profitably, before expanding your footprint. This will teach you a lot about your trading style.
Secondly, traders must learn to control their emotions. One way to accomplish this is to develop a strategy and stick to it. It’s too easy to let the excitement of trading lead you down the track to losses. And if you’re trading on emotion, you start to gamble with your forex account. Using a principled strategy, though, can help you avoid this.
Study Money Management
Money management might be one of the single most important tools for maximizing profits as a day trader. Learn the principles and follow them. First, start slowly with a small initial investment and grow your account organically. Adding more money to your account won’t help you get rich. In fact, it may have the opposite effect, enabling you to create greater losses.
Plus, focus on using stop losses to minimize risk and learn to protect your profits. Develop a disciplined strategy built around protecting your profits, and then, reinvest those profits. You should use these profits to build up your account over time.
For beginners, the risks of trading forex are clear. But there are many different steps that can be taken to minimize those risks. Start small, develop discipline and learn to manage your money properly. If you can do that, you’ll more likely to protect your profits.