Risk management offers protection over losses on Forex Trading. Similar to a roller coaster ride, Forex will only harm unprepared traders. But there’s actually nothing much to worry about. Certain strategies will help curb the risks associated with every trade you make. With these strategies, you can turn trading Forex into a full-time career. One important strategy that every trader needs to master is the art of risk management. It should come in front of all those trading strategies that you have.
Even before thinking of the money that you want to rake when trading, you must first consider protecting what is inside your account – your investment money. Remember that if you lose it, then you definitely won’t make a single profit. You will resort to quitting and breaking away for some time. Here are some important tips when planning for an effective risk management plan.
Monitor Position Sizes
Before anything else, you need to know the percentage of your money you want to use for trading. If you have it, then stick to it. For instance, you have $10,000 in your trading account. You can limit your risks with just 1%or even 0.5% on every trade. This is equivalent to $100 or $50 per trade.
Placing The Stop-Loss Order
One of the most crucial decisions you will make with regards to risk management is the placing of the stop-loss order. A stop-loss order will automatically close down a trade before incurring too many losses. To effectively place a stop loss at the most suitable position, you will need to determine how many pips you can risk. Most of the time, it is ideal to choose a position close to the entry point.
One common mistake done by new Forex traders is the capability to determine the exact point as to when they can take profits. There are certain strategies that you can utilize to effectively manage the taking of profits. The most suitable solution for new traders is to place a ‘close position order’. Some strategies utilized by traders are candlestick recognition as well as the moving average crossovers.
Creating a Trading Plan
Any experienced trader can attest to the advantages of having a trading plan. Do not rush into trading and formulate an effective trading plan before joining the battle. Having a trading plan and sticking to it will help you from creating decisions out of emotions.
To properly implement your trading plan, you need to be disciplined at all times. This will not just benefit your trading strategy but will also improve your capital. Remember that you can take thousands of returns every day but you cannot lose it.
Have a Trading Journal
Checking the things you did in the past will help counter your mistakes in the future. A trading journal will help you with this. Since risk management is all about reducing the risks in Forex trading, it is best if you can keep track of it and view your trading decisions in the past at a later time.