In 2019, the forex markets experienced a daily turnover of $6.6 trillion which was a $1.5 trillion increase from 2016. This is proof that this type of investment is highly volatile. You can make a killer profit but if you’re not careful, you could also incur staggering losses.
How do you know when to walk away? You need to apply strategic techniques so as to protect your money. If you get into forex trading without a plan then you’re simply gambling.
Here are 4 risk management strategies that will help you become a more knowledgeable forex trader.
Identify Your Risk Tolerance
How much money are you willing to lose? Use factors such as your experience, investment goals, age, and your FX trading knowledge to determine your risk tolerance. It’s not about stressing less about fluctuations in currency, it’s about being in control of your trades.
Once you know how much you’re willing to risk, you’re able to strike the perfect balance between trading enough money without hurting your finances and achieving your investment objectives.
Always keep your trades within your level of risk tolerance. This will increase your chances of success.
Stick to Your Stop Losses
Don’t get into trades focusing on your profits alone because this can be disastrous. You also need to accept calculated risks by identifying a realistic risk to reward ratio and calculating a protective stop loss. This will help you protect your assets and keep your drawdowns in check.
Make sure you define the risk for all positions as this will help you set target limits for your forex trades. This applies even when the market has favorable conditions.
Use Indicators Before Deciding to Sell
When it comes to mitigating risks in forex trading, a stop-loss always comes in handy. You should however combine them with indicators as they are the best way of identifying the prevailing market conditions.
For example, if the indicators show an adverse shift in a certain currency, you can exit a position and protect your investment.
Don’t Let Your Fear Dictate Your Trades
Forex trading is a numbers game that also comes with the risk of losses. You need to take calculated risks with the hope that you will make profits. However, there are times when traders, even the most experienced ones, let emotions dictate their trades.
For example, if you suffer a 20% loss on a particular trade, don’t stay open hoping to make a profit. You could end up losing more of your money.
Don’t be afraid to take losses..it’s all part of the game. Focus on your end goal and stick to your trading strategy.
Improve Your Forex Trading Strategy Today
Other risk management strategies include:
- Going into trades with an open mind; losses are bound to occur.
- Understanding related currencies before making a trade.
- Taking profits to protect your portfolio.
There are more than 4000 currencies in the world and with the above tips, you have all you need to invest wisely and manage risks. The only thing remaining is finding the best trading account and you’ll be set to go.