The popularity of forex trading has always been high for a number of reasons. The main one is the outstanding profit potential, provided by a significant financial support of intermediary companies. It is made possible through leverage, the range of which varies in the range from 1: 2 to 1: 1000. That is, when working with the maximum leverage, it is enough to have 100 USD to buy 100,000 units of currency on a trading account. This business model was developed by brokers to attract customers and today it is fully justified.
Use of leverage makes risk management an inseparable part of Forex trading. Risk assessment is the cornerstone on which the infallibility of forex trader’s actions and the profitability of transactions largely depend. In fact, it can be said that any transaction on Forex is a high-risk enterprise that does not guarantee a favorable outcome. However, by applying risk control methods, every trader can significantly increase the overall profitability of Forex transactions and minimize losses, preventing them and reducing losses.
Risk management is based on four main factors:
- how fast the trader reacts to the the formation of the reverse movement of the market;
- analytical approach to forecasting the risks of the transaction;
- differentiation of permissible and unacceptable risks;
- elimination of unjustified risks due to clear action planning.
And the basic rule, according to which it is necessary to act, is the need to combine the exact calculation and luck, not exceeding the level of weighted risk. Only such an approach ensures reasonable risk management in any situation.
However, in addition to this, there are many rules, following which one can minimize the riskiness of transactions.
1. Any doubts should be interpreted not in favor of the market.
In fact, the presence of doubt indicates that the action plan is not as good as one would expect. And, if the market behaves unstably, going beyond the forecasts, or doubts do not allow the trader to act calmly and deliberately, it is better to get out of it, minimizing losses.
2. Excessive emotionality jeopardizes trading
The inability to control emotions for the trader is a sign of incompetence. To trade in the foreign exchange market, composure and sanity are simply necessary, without which it is impossible to ensure sufficient predictability of actions. If your self-control is failing you, and emotions take over the mind - you need to get out of the trade and temporarily withdraw from the situation. A change of activity (intellectual to physical) or communication with other traders who have been in a similar situation and managed to curb their emotions helps to cope with them.
3. Less is better
The practice of currency trading shows that traders, concentrating their forces on preparing for a single transaction, demonstrate a much greater efficiency than those who spread their attention in several directions. Qualitatively prepared transaction will always be lower risk than the results of intuitive trading. A smaller number of transactions saves the trader from having to pay excessively large commissions.
4. Defense against attack
When starting a trade, you need to be prepared for the fact that the market can turn against the predicted direction. Before starting work, it is necessary to calculate all possible risks, protecting the transaction from losses.
Protection measures include:
- setting "stops";
- calculation of the maximum allowable amount of the loan in the current situation;
- safe and prepared exit from the market based on pre-planning.
5. Trend Trading
Trading with the trend is one of the ways to minimize risks. When a market reverses against a trend or a deliberately unsuccessful opening of positions, it is worth reducing the size of risk by applying one of the available methods. But it is worth remembering that even damages make it possible to accumulate your own experience, allow you to evaluate actions and analyze the causes of errors, having developed subsequently ways to eliminate them.
6. Stop loss and take profit
Unfortunately, there is still no such strategy, which would bring only profit and not give false signals. Therefore, in order to prevent growing losses, it is always necessary to place a Stop Loss protective order. The use of stop loss and take profit levels is the main way to minimize risks. If the levels are set correctly, you can achieve the fastest possible closing of the transaction at the initial stage of the negative market movement. And the use of time-based stoplights allows you to cope with the situation in the event of a trader’s uncertainty in making decisions or choosing a trading strategy.
7. Risk diversification
Trading on the foreign exchange market can generate good profits. To see this, just look at the ratings of traders. However, the majority of speculators will be characterized by a wave-like movement of equity (the actual amount of cash currently available). This is due to the peculiarity of the market, where the trend gives way to flat, and the bullish mood of market participants can sharply turn to bearish. The usual statement that you should not “put eggs in one basket” is not without meaning. Having a certain amount of funds at your disposal, it is necessary to float only a part of them, keeping a certain part of the capital as a reserve fund. And concluding several transactions, it is necessary to calculate the amount of the amount that will be used to secure each of them, beforehand, on average, allocating not more than 5% of the total funds for opening one position.
8. Trading systems
Having our own trading system gives the trader the opportunity to minimize risks through systematic trading based on forecasting and application of analytical data. A trading strategy is a clearly formulated set of rules and parameters, the implementation of which allows the trader to open a transaction. For trading in the Forex market, traders use different types of strategies depending on the trading time, the indicators they use, the risk level or the trend.
9. Technical failures
To avoid the risks associated with technical failures of equipment and other non-standard situations, it is possible, by refusing the "physical" use of a computer in favor of virtual servers with the possibility of permanent remote access to control the operation of the terminal.
10. Unfairness on the part of a broker
Probably, every trader in the early stages of his professional activity came across scam brokers. These organizations are positioned as reliable intermediary companies, but in fact they are only engaged in deceiving those who are interested in making money in the financial markets of users. Unfortunately, online trading fraud is not limited to this type of intruder. The illegal activities of individual enterprises in financial markets led to the development and popularization of so-called chargeback companies. These are legal organizations that specialize in the return of funds from "black brokers", but up to 97% of such formations are also fraudulent. In fact, to reduce the risk of fraud on the part of the broker is possible only by preliminary collection of data on his work. When choosing a broker organization, you must carefully check all information about its reputation, including customers' reviews and weigh the decisions made, based on your own preferences and an objective assessment of the situation.
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Author: Kate Solano, Forex-Ratings.com