Tips and News

5 Risk management strategy for Forex Trader

Forex Trader

Often, beginner Forex traders think that they can earn money via Forex trading very easily. But actually, it’s not so simple, because it needs lots of practice, time, dedication and commitment to making yourself prepare and earn from this market. You should not just open a position in your trading platform without doing proper analysis and cannot just avoid the trading conditions, the risk which is set by your broker. Forex is related to real money and no one likes to lose money, so every trader should follow some risk management rules so that they can manage their risk and money. If you don’t follow this, then you are just gambling in this market.

Only invest your extra money

The first and the most important rule is,  if you are doing Forex trading or any kind of trading is that you should only invest the amount of money that you can ready to lose. Not only beginners but also old Forex traders do not follow this rule, because they think that they are not going to lose their invested money. As a result, they invest more than they afford to lose. For a moment consider trading as gambling in the casino, so do you think are going to take all your money to the casino for gambling in blackjack? We know the answer is, no.

So you should not take an unnecessary risks by investing the money that you need for living because you can lose it any time. On the other hand, it also gives you extra pressure and stress. Trading under stress and pressure will never end well because it increases the possibility of making mistakes.

Fix Your Risk Reward Ratio

After investing and starting trading you have to fix the amount of risk you are going to take for each trade. By following a fix risk-reward ratio you can be profitable, though your winning trade rate is lower than the losing trade rate. We suggest a beginner trader should follow the risk-reward ratio of 1:2. He should set his stop-loss and take profit level according to his risk-reward ratio and should never break this rule. You can increase your risk-reward ratio when you are enough experienced and feel confident about your trading. If you are looking for a free educational resource, get it from here. You can also choose an elite broker like Saxo as many traders in Hong Kong have taken advantage of Saxo Academy’s resources.

Keep Your Risk Consistent

Most of the amateur trader increases there lot size after winning a few trades. They think their winning stick is going to continue as a result they break their rules of the fixed lot and increase the lot size. As a result, they end up with a blow-up account by losing all the money from his trading account. So always keep in mind that though you had won a few trades that don’t mean that the next time market will be on your side. A trader should never risk more than 2% of his trading balance without having a strong reason behind them. So when you are building your trading strategy, calculate the effective lot or position size according to your trading balance and stick to that size.

Understand and Control Leverage

Leverage is the main reason why the Forex market is so awesome. Leverage gives a trader powers to trade with more capital than he deposit. For this, your broker will just put aside a small amount of your balance for opening any position. But using leverage without understanding it can be harmful because it not only magnifies your profit but also magnifies your losses. For this, you have to have a clear knowledge of leverage and margin call.

Take Currency Correlation into Consideration

The Forex market comes with a currency pair, so it is important to understand the correlation between currencies. In this case, correlation means how the price change in on currency can affect the other. Two currency pairs can be called positively correlated if they tend to always move in the same direction and if not then it’s called negatively correlated. Traders have to keep this in mind to avoid opening positions that will cancel out each other and also opening positions with the same base or quote currency.

Conclusion

Trading is not an easy task, mistakes can happen at any time. So always review your trades and make a journal which is going to help you with improving your trading. Try to learn from your mistakes and accept your losses positively. Always follow your risk management rules and consider our discussed topics no matter how bad your trading day is going.