Forex risk management tips to boost your trading
Making profits in forex is easier with good forex risk management tips. With Tradehall, a meta-5 trading platform, you can trade forex systematically.
Perfect for a newbie or someone who already has some trading experience, there are various risk management practices worth your attention.
We will dive into some essential forex risk management tips in order to trade profitably or at least to avoid any unintended losses.
Set up a trading plan
Let’s begin by preparing a trading plan. A trading plan is essentially a framework that guides traders through the entire risk management in forex trading.
It sets the conditions under which a trader enters trades, identifies markets, exits trades, and manages risks along the way.
It can also help you maintain discipline and indirectly manage your emotions in the volatile forex market.
The trading plan ensures accountability. Meanwhile, it also keeps traders focused on their personal strategies.
9-Point Checklist To Create a Trading Plan
• Decide which currency pairs to emphasize on
• Update on major business news releases
• Choose your selected timeframe
• Check whether the market is in a trend or a range
• Identify support and resistance area
• Check for short, or long setup based on strategy
• If strategy rules do not fit, stay out
• If strategy rules fit, execute
• Determine entry and exit prices based on the strategy
Read and watch the news
This is basically fundamental analysis at work. Fundamental analysis in forex involves analyzing economic, social, political, geopolitical, and global driving forces which can affect the country’s economy relating to the currency you are trading.
Some macro-economic indicators, such as national employment figures, central bank decisions ie. interest rates changes, or credit rating reports on GDP growths can cause sudden erratic market fluctuations.
Therefore, monitor closely on central bank updates, political news, and the market reaction to stay alert while managing your trading risks systematically.
Another risk management strategy that saves you from devastating losses is the risk-to-reward ratio analysis.
Whenever you are starting out your forex trading, one of the first things you need to think about is what amount of profit you want to get and how many losses you can handle.
As experienced traders claim, the best risk-to-reward ratio is 1:3 – where for every 1 share of risk you’re getting 3 shares of reward.
To discover the ratio, compare the amount of money you are risking on an FX trade to the potential gain.
For example, if the maximum potential loss (risk) on a trade is $300 and the maximum potential gain is $900, the risk-reward ratio is 1:3.
So, if you place 5 trades with this ratio and you were successful on just one of those trades, you could have made $600, despite only being right 20% of the time.
Use stops and limits
Due to the forex market being particularly volatile, it is very important to decide on the entry and exit points of your trade before you open a position.
What is a Buy/Sell Limit Order?
A limit order is a request to buy at a price lower than the current price or a request to sell at a price higher than the current price.
Limit orders will follow your profit target and close your position when the price hits your chosen level.
For example, if the current trading price in GBP/USD is 1.61086, you might leave a limit order to buy at 1.61070. If the current bid in GBP/USD is 1.61086, you might leave a limit order to sell at 1.61099
What is a Buy/Sell Stop Order?
Stop orders will close your position automatically if the market moves against you.
A stop order is a request to buy at a price higher than the current price or a request to sell at a price lower than the current price.
As an example, If the current price of spot EUR/USD is 1.38985, you might leave a stop order to buy at 1.38998.
If the current price of spot EUR/USD is 1.38985, you might leave a stop order to sell at 1.38975.
The two risk management for forex tips: risk-reward ratio and limit/stop orders are tactical tools.
They dictate the course of action you take immediately during a trade.
Nevertheless, there is a strategical method that targets your overall attitude towards risk management in the forex market.
It is called trading psychology. It highlights one’s mindset to take when the person trades in any financial market. Such mindsets are fear, greed, anxiety, etc. towards losses or profits.
Worry not as here are some takeaways for you to get the most out of your trading sessions:
Do not assume immediate profits
The overwhelming majority of successful traders have amassed their fortune by building their portfolios step by step, with incremental gains and occasional losses. Being consistent and determined is the only way towards success in this business.
According to statistics, at least 80% of traders lose money at least once in their careers.
This is understandable because, unlike other markets, forex trading is a zero-sum game ie. when one wins, the other loses.
However, it is not about not losing, it is about having consistent profits and occasional losses in this market.
Take a break after a while
After some time, forex trading can wear you down emotionally little by little.
Therefore, in order to maintain effectiveness in trading, you need to give yourself occasional breaks and dedicate your time to other things, be it family, hobby, or others.
Warm-up with a demo account
The objective of practicing forex trading using a demo account is to simulate live trading as real as possible.
This practice session can also assess your risk tolerance level before you enter the market.
What is the major difference between a demo and a live account? With a demo, you will not sacrifice any real money. In return, you can raise your trading confidence in a risk-free situation.
Eager to know more about risk management for forex trading?
Check out our educational resources: free economic calendar, selected risk management tools, tutorial videos, and many more.
Contact us at Tradehall today.