When trading Forex, perhaps the most important aspect is risk management. Every trader wants to keep his/her losses at a minimum. At the same time, traders also want to make as much profit as possible from each trade. Most Forex traders make losses stemming from poor risk management, not from inexperience, or lack of market knowledge. For you to become a successful trader, you must learn proper risk management strategies.
What is Risk Management?
The Forex market is the largest financial market globally. Its transactions total over $5.1 trillion every single trading day. With such astronomical amounts of money involved, traders have the potential to either make huge profits or losses. Forex trading risks include:
- Market Risk
This risk involves the financial market’s performance going against your expectations, which is the most common risk for Forex traders. For instance, you may think the US dollar rise against the GBP, and you opt for a EURGBP currency pair, which falls and you incur losses.
- Leverage Risk
Most traders make use of leverage for opening trades larger than their trading account deposits. This may lead to the trader losing more money than they had deposited in their account.
- Interest Rate Risk
The interest rate of an economy has an impact on its currency. This means traders risk facing unexpected fluctuations in the interest rate.
- Liquidity Risks
Some world currencies are more liquid. If a currency pair is termed as high liquidity, it means there is a higher supply than demand for the pair. This means trades are executed very quickly. For currencies with low demand and more supply, delays in opening and closing your trades on MT4 might occur, and delays in the trade execution. If the trade goes unexecuted at the price you were expecting, you might get less profit and sometimes, losses.
How to Manage Forex Risks
- Education on Trading and Forex Risks
If you are a newbie, educate yourself on everything there is to learn about Forex. Learn about trading platforms such as Metatrader 4 (MT4) by visiting sites like https://www.equiti.com/platforms/metatrader-4/ to learn more.
- Free Courses Online
As a new trader, you can improve your risk management education by taking Forex courses online.
- Use Stop-Loss Tool
Use a tool called Stop-Loss that allows you to shield your trades from unforeseen market fluctuations. This tool allows you to set a price where your trade will close automatically and avoid losses. If you enter a position, hoping the asset will appreciate, and it instead depreciates, the trade will close if the asset reaches your stop-loss price.
- Use Take-Profit Tool
Take profit is a tool similar to stop-loss but works the opposite. The stop loss is for automatically closing potentially losing trades and a take profit is designed to close a trade once it gets to a predefined profit level.
- Do not Risk More than you can Afford
Risk management rules in Forex dictate is that you should not risk what you cannot afford. A lot of o traders make this mistake, especially new traders. The unpredictability of the Forex market means you might lose more than you can afford. These losses will place you in a vulnerable financial position.
- Be Realistic
Traders make risks they cannot afford because they set unrealistic goals and expectations. They assume being aggressive will help them make their ROI process faster. The most successful traders are satisfied with steady profits by being realistic in their goals and being conservative and cautious in their approaches.
- Have a Plan
Have a plan. Do not trade on a trading platform and rely on instinct or hearsay about the market. You might be lucky once or twice, but you may also be unlucky. Have a plan that involves:
- When to open and close a trade
- Set a minimum reward-to-risk ratio
- Set the percentage of your account you will risk in each trade
Traders make losses by being too brash and wanting huge profits. Be slow to act, but not too slow. Learn how and when to strike a balance. Educate yourself, have a plan, set realistic goals, and make use of available tools.