Online forex trading comes with many rewards, but like any other form of online trading it involves considerable risks. Whether you are a beginner trader or more experienced trader, you will need to ensure that you have the right risk management plan in place to limit losses and protect your account and funds. Before moving on to some very useful tips for risk management, it will be important to explain what trading with CFDs involves.
Trading with CFDs
CFDs, or contracts for differences, are an alternative to conventional modes of trading. CFDs allow traders to trade without having to actually buy/sell the asset they want to trade. They are much cheaper too as you don’t actually own the underlying asset but you are simply speculating on whether its price will go up or down. They are also leveraged derivative products which means you can trade them with leverage.
By adding a small amount of your funds and borrowing the rest from the broker, you can command a larger position which will offer you the ”leverage” to make more profits if the market moves in the direction you expect, or you can incur bigger losses if the market moves against you. With CFDs, you can trade a wide range of trading instruments, from forex to stocks, indices, commodities, metals and futures.
Before you start trading with CFDs, and to ensure you manage your risk and avoid costly mistakes, you should research the contract specifications for each instrument you want to trade. In your MT4 platform, choose the Market Watch tab and right-click the instrument and note the Contract size value.
Risk/reward ratio
The risk/reward ratio calculates the difference between the risk of loss and what you expect to make on a specific instrument. The risk/reward ratio is an essential part of a risk-management strategy and traders should consider this before they start trading. Traders want to find trade setups where the reward is more than the risk, and where a larger reward means you have more space to make mistakes.
As a rule of thumb, the higher the risk, the higher the expected reward. Traders tend to consider appropriate a risk reward ratio which is higher than 1:3.
Economic data and risk
Wise traders always stay up to date with the latest market events and releases so they can prepare, organise their trades and make informed decisions. However, it is not unusual for beginners to jump right into a trade without checking an economic calendar. An economic calendar is essential for every trader who wants to know what releases will generate volatility. If you are trading CFDs on forex then news releases could influence your trades and ensuring that you know when this will happen, will help you avoid unnecessary risks when trading.
When trading around news events, traders need to be prepared as when they execute trades ahead of a release, prices may move unexpectedly so they need to have a hedging strategy in place to protect against unexpected losses, reduce risk or close the position instantly.
Macroeconomic data such as employment reports, inflation rates or manufacturing and services PMI are important releases for traders. Generally, any economic releases that show how well the economy of a country is doing can create big movements in the market as well as gaps. Gaps, or windows, are spaces when there is no trading and these can occur unexpectedly.
Trading plan
If you want to trade consistently and for the long run, then you need to approach trading seriously and in an organised manner. Successful traders, or traders who have consistent profits are traders who have taken their time, considered the potential risks and created a well-defined trading plan. While in the beginning, the excitement and determination may generate some positive results, to proceed and correctly manage risk, you will need to develop a plan that works for you.
A trading plan includes all the necessary information a trader will require when executing trades including their trading accounts, objectives, time, risk and money-management strategies, trade setup details such as entry, exit (stop-loss orders), and take-profit rules for each strategy.
How to manage your money
While trading requires you to have significant knowledge of the markets and trading strategies, it is also essential to understand how to best manage your funds. When it comes to your money, you need to consider how big or small your positions will be, understand the risks involved when trading with CFDs, and find and apply solutions to reduce those risks. While it may sound easy, money management would take considerable time and would require you to be alert and manage your trades, be disciplined and make hard decisions to reduce losses, if and when these arise.
Trading is not based on luck, but hard work
New traders may score a few good trades, but that’s most likely down to beginner’s luck. With so many websites and educational forums, there’s no excuse for traders trading based on instinct or luck. Traders these days can access technical indicators and develop trading strategies that reduce risk. Traders can use fundamental analysis but for those who want to avoid risk, learning technical analysis is a must.
Control emotions
Never underestimate the power of emotions and your reaction to unexpected situations that could easily make an account disappear. From greed, to FOMO, anger, excitement, traders can experience a whole range of feelings that can influence their choices. If you’re not experienced, calm and rational, you could make rushed decisions, ignoring technical analysis and risk management strategies that you had in place.
If you want to become more confident and take it step by step, you can open a demo trading account. IronFX provides access to a risk-free demo account where you can practise your strategies with virtual funds. If you prefer to experience real trading conditions, but you don’t have the relevant knowledge, you can alternatively try automated trading.
Trade with a trusted broker
IronFX is a regulated broker that provides access to a wide range of financial markets with excellent trading conditions. If you are starting out, you can open a demo account and explore their selection of account types, check out their trading platforms and experience CFD trading with a global, multi-asset broker.
