Managing your risk when trading forex

The ideal world for a trader is when they sail through the markets, making winning trades regularly without even the consideration of a loss or downturn.

The truth, as you might expect, is a lot different.

Even the very best of traders will experience losing trades, however, the defining factor that makes them long-term profitable – and other traders not so – is that they a) appreciate their risk and b) have strategies in place to manage them.

Every single trade has risk attached to it of a varying degree. Still, if you can apply some basic risk management strategies, you will keep any subsequent losses to a minimum and that, crucially, will help to keep your bankroll looking healthier for longer.

#1 – Only risk what you can afford

Okay, so it’s kind of a boring point, but also the most important.

The best way to manage your risk is by only putting money into your brokerage account that you can afford to lose. That way, you can make more level-headed decisions without causing yourself long-term financial harm.

When you are new to trading, don’t fixate on the amount of profit you are making – instead, focus on the percentage that you are up or down. After all, you can always scale up when you find yourself in possession of a winning strategy. 

#2 – Manage your expectations

The worst thing you can do in trading is to go into it with a fixed ambition of ‘I’m going to make X amount of money’ or ‘I want to be able to buy a Ferrari.’

It’s nice to have goals, of course, but too often a target can be a distraction and rarely for the better.

Success isn’t about a single trade that nets you thousands. Often, the most successful are those who grind out smaller but consistent profits from trades that have less of a risk profile.

#3 – Utilize stop-loss

One of the main contributors to a trader’s downfall is the unavoidable element of human emotion.

When a position goes sour, you can see your red number increasing, and the temptation is just to sit and wait and hope that things will soon get better.

Well, sadly, things don’t always get better. That is where the stop-loss function comes in handy. 

Platforms like the eToro broker offer several tools like stop-loss to let you manage your positions more effectively, and this ultimately protects your capital from taking too much of a hit.

Trading without a stop-loss is like skydiving without a parachute – the results can be messy!

#4 – Don’t be greedy

The other side of the spectrum to the stop-loss is the ‘take profit’ tool, which as the name confirms allows you to lock-in a target figure for winning trades.

It’s easy to be greedy when things are going well, and the temptation is to try and eke out some extra profit when you’re in the green.

But as we know, these volatile Forex markets can quickly turn, and at that point, your carefully planned risk-reward theory goes out of the window.

Our advice? Use the take profit tool and remove much of the human element from your trades. 

#5 – Don’t leverage your money away 

When trading leveraged markets, the dollar signs start to appear in front of newbies’ eyes.

But for every great reward also comes exposure to a significant loss, and leverage tends to maximize your position – be it winning or losing. 

Yes, it is tempting to max out on your leverage to make a heightened profit but remember that one poorly-timed trade with high leverage could wipe out much of your bankroll in a single sitting.

Manage your risk to maximize your returns!

2 thoughts on “Managing your risk when trading forex”

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