Forex Trading and Risk Management: Strategies for Successful Trading
Any investment comes with risk, but forex is among the riskiest. In a market active 24/7 with high volatility, even the most experienced traders experience high losses. Despite loss being inevitable, there are ways to manage the risk and get the most out of this potentially lucrative market. Below, you will find a number of strategies for successful forex trading.
Get Educated
Education is the starting point for all investors. Without a basic grasp of forex trading strategies and terminology, you won’t stand a chance of succeeding. Even when you’re a seasoned forex trader, there will always be something new to learn. The most effective way to succeed is to keep reading, continue listening to podcasts, follow experienced YouTubers, and do anything else you can to get educated.
Only Risk Against Affordability
Arguably the best way to manage forex trading risk is to only invest what you can afford to lose. If you’re mentally ready to make a 100% loss, you’ll feel much more satisfied when investments bring in substantial returns.
Have a Solid Forex Trading Plan
If you find a reputable forex broker, deposit money, and start making trades without anything but pure instinct to steer your decision, you’ve got a one-way ticket to substantial losses. To avoid shooting in the dark, head into the live market with a solid forex trading plan, which should include the following information:
1. When you will open a trade.
2. When you will close the trade.
3. Your minimum ratio for risk vs. reward.
4. The balance percentage you’re comfortable risking for each trade.
Keep Leverage to a Minimum
Leverage is a system that lets you increase profits by “borrowing” money for trades. The reward can be enormous if you’re lucky, but the issue is that many traders aren’t. When you lose a leveraged trade, you may end up with a negative balance or you’ll simply burn through previous profits. Either way, it’s best to steer clear of high-leverage trades until you feel comfortable.
Use Stop Loss and Take Profit
The forex market is awake 24/7, but no investor can be permanently glued to the charts. To avoid any surprise losses, it’s recommended to set “stop loss” and “take profit” orders.
A stop loss order allows you to safeguard your trades from volatile market movements. When you initiate a trade, you’ll have the opportunity to set a loss limit that sits within your risk appetite. Having a stop loss in place means you can sit back and focus on other areas including researching your next investments.
As you may have guessed, take profit is a tool used to automate trade withdrawals. All you need to do is decide on a desired - yet realistic - amount of profit. When you have very clear expectations for each trade, you have a firmer grasp of the risk.
Risk management strategies in forex will vary depending on your goals, risk appetite, and trader profile, but the insights offered above are a great way to manage risk when you’re first starting out.