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6 Best Risk Management Strategies for Forex Trading

6 Best Risk Management Strategies for Forex Trading

If you’re involved in forex trading, then you should absolutely have your risk management strategies in place. Here, we list out, from our experience, some of the best risk management strategies you should adopt while trading. It’s usual for beginner Forex traders to believe that generating money through online Forex trading is quick and simple. However, if you want to be successful and lucrative in the Forex markets in the long run, it is a process that requires time, attention, commitment, and patience. For advanced strategies on trading forex, you can visit the bitcoin up site.

You cannot just establish a position on your trading platform without considering the trading conditions provided by your forex broker, the market, leverage, liquidity, and counterpart risks, all of which effect your capital. A great forex trader once said: 

You also need to apply tools and techniques to manage your money and risks – if you don’t do those things, you wouldn’t be trading – you’d be gambling.

6 Best Risk Management Strategies for Forex Trading

Strategy 1:  Only Trade with Money that You Do Not Need

It may appear simple, but the first rule of Forex trading, or any other type of trading for that matter, is to only risk money that you can afford to lose. Many traders, particularly novices, disregard this guideline because they believe it “won’t happen to them.”

If trading were like gambling at a casino, you wouldn’t take your whole bankroll to the casino and bet on black, would you? It’s the same with trading – don’t take extra risks by investing money that you need to survive.

Here’s why:

Firstly, because it is possible to lose all of your trading money, and secondly, because trading with funds from which you live will bring extra strain and emotional stress to your trading, weakening your decision-making abilities and increasing the likelihood of making mistakes.

Because the currency markets are volatile, it is best to trade “conservative sums” of your disposable income. If you can’t afford to lose the money you’re dealing with, trading isn’t for you.

Strategy 2: Use Stop-Loss and Limit Orders at all Times

Orders are instructions to your broker to execute a transaction when the underlying market price reaches a specified level. To refresh your memory, here’s how stop and limit orders work.

Stop-loss orders are put on open positions to pull you out of a transaction if the market goes against you, thus “stopping your loss.”

There are three reasons why you should use stop-loss and limit orders on all of your trades:

  • It’s merely good sense to hedge your bets.
  • Your thinking has improved, and you may leave your trading screen knowing that some kind of security is in place.
  • The procedure allows you to compare the deal to your trading plan.

Strategy 3: Consider Your Risk Tolerance

Before you begin trading, you must establish your risk tolerance based on the following factors:

  • Your age
  • Your understanding of foreign exchange trading
  • Your knowledge
  • How much money are you willing to risk, and
  • Your investing objectives

Knowing your risk tolerance isn’t only about sleeping better at night or worrying less about currency swings. It’s about knowing you’re in charge of the issue since you’re trading the proper quantity of money in connection to your particular financial condition and financial goals.

Keep your trade within your risk tolerance to enhance your chances of success.

Strategy 4: Set Your Risk/reward Ratio to at Least 1:2

Understanding the risk/reward ratio (RRR) will increase your chances of being profitable in the long term, as will establishing stop-loss and limit orders to preserve your cash.

The distance between your entry point and your stop-loss and take-profit orders is measured and compared using an RRR.

We’ll discuss trading methods in the following chapter, but scalpers and day traders should strive for a minimum RRR of 1:2, while longer-term swing and position traders should aim for a broader minimum of 1:3.

As an example,

If the distance between your entry point and your stop-loss order level is 50 pips and the distance between your entry point and your take-profit limit order level is 150 pips, you’d use an RRR of 1:3, because you’re risking 50 pips to possibly make 150 pips (150/50 = 3).

The risk/reward ratio is a useful tool for determining stop-loss and take-profit orders based on your risk tolerance, and every prudent trader should manage downside risk.

Strategy 5: Manage Your Risk Each Deal

You should also evaluate your risk each transaction as a proportion of your trading capital and set it at a cautious level; this is especially crucial if you’re new to trading and are more prone to make mistakes than someone with more expertise.

You should only risk a tiny amount of your trading money per trade; a decent beginning point would be no more than 1% of your available capital per deal. If you use sound RRR, it implies you’re risking 1% for a possible return of 3%.

Here is the effect of three different per-trade risk levels – 1%, 2%, and 10% – on a $100,000 account balance over a 30-trade losing streak. The trader who is risking 10% each transaction has lost 95.3 percent of their account balance, the trader who is risking 2% is down 44.3 percent, and the trader who is risking 1% is down 25.2 percent.

We’re showing you this to demonstrate that the more a trader risks per trade, the more difficult it is to rebuild capital after a string of losing trades. Although it may not be 30 in a row, which is extremely unlikely, losing streaks do happen – to every trader at some point – and you don’t want them wiping out your capital to the point that you can’t rebuild.

Strategy 6: Maintain Consistency in Your Risk

Most novices will raise the size of their positions as soon as they start generating money, which is one of the fastest ways to wipe out your account. Maintain consistency in your risk.

You should not become overconfident or risk-averse. Just because you’ve had a few profitable deals doesn’t indicate your next one will be as well.

Becoming overconfident or less risk-averse will cause you to change your money and risk-management policies without good reason. When developing your trading strategy, you had to establish guidelines for determining the effective size of your holdings.

Understanding risk management strategies for forex trading is only the first step in developing a profitable trading strategy; now you must keep to and adhere to your trading strategy! Do well to drop your thoughts and questions in the comments section below. Cheers!

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