Managing your risk in forex trading is the key to become a successful trader and make money. A lot of times, traders lose money not because of lack of skill, but due to poor risk management.
In this article, we will discuss the different methods that are available to minimize risk in forex trading, helping you avoid losses and focus on becoming a consistently profitable forex trader:
Follow a robust trading strategy
It is common knowledge that discipline is one of the critical aspects of forex trading. To establish and maintain that discipline, you need a sound and robust trading strategy. A good trading strategy gives you confidence, and that confidence, in turn, helps you maintain discipline.
There is no one best and most profitable trading strategy, as different trading strategies are suited to different markets and different types of people. So, the trick is to find out which trading strategy best suits you and works out for you. The best way to achieve this is through experimentation without putting too much capital at play.
Remember that a strategy that suits you might be disastrous for someone else, and it is therefore important to find the right fit.
Plan every trade
Planning is a vital factor in differentiating success from failure, especially in forex trading. A phrase commonly heard from successful traders is “plan the trade and trade the plan.” This is a quote around which you should base your trading practices. \
A trading plan is essential in the sense that it allows you to perform a pre-trade analysis, which enables you to set an appropriate take profit and stop-loss order for each trade. Through planning, you can also set time limits on your trades, so that the trade is closed out in case the market does not perform as expected within a particular period.
Limit risk on each trade to 2%
A lot of professionals and experts in trading vouch for the 2% rule. By adhering to this rule, you will still have enough capital to stay in the game despite a drawdown period. By not following this rule, there are chances that you might lose ridiculous percentages of your account, even up to 85% or 90% of your account!
Many traders ignore the damaging effects of a significant drawdown on a recovery. Remember that for instance a 20% drawdown would require a 25% return to recover to break-even, and a 50% drawdown would require a 100% return to recover breakeven!
Don’t overtrade – Schedule your trading hours
Tempting as it might be to trade all the time, overtrading often leads to disaster. It is imperative for a trader to determine the reasons for trading, and analyse to see whether these reasons are logical and not just the result of gut feelings or the need to be part of the action.
The key here is reasoning, which should merge perfectly with the overall trading strategy. A tool that you can utilize to avoid overtrading is to schedule your trading hours, and only trade within the time you have designated for yourself.
To help you remember how you can better manage risks in forex trading, go ahead and download the new Managing Riskfactsheet here.