How to reduce risks in Forex trading?
Forex trading involves a certain degree of risk. Only by consciously managing your capital you can save money from loss, reduce risk and make a profit. Financial consultants recommend basic ways of reducing risks in trading:
- Investments should not exceed half of the capital. Traders are advised to keep some capital in reserve to be able to use it in unusual situations and for further efficient use.
- Invest no more than 15% of total capital in any one position. This approach allows you to protect yourself from big losses on one deals at the expense of profits on other ones.
- Open new positions only if the market situation is predictable. Trade in the direction of the trend, the opposite direction is risky.
- It is advisable to risk less than 5% of the investment amount. This principle allows you to protect yourself from huge losses.
- Diversify your investment portfolio. Be reasonable and prudent in doing so, keeping a balance and not spreading funds out in multiple directions.
- Use a Stop Loss. These orders allow you to fix losses and protect yourself from losses due to adverse price movements. In this case the technical means come to the rescue, which simply close the position at the moment "X" if "the market went the wrong way". Traders, especially beginners, often feel sorry for closing a losing trade. They take more and more losses, depriving themselves of maneuvering power, and more often than not, they lose their account completely. It is advisable to place orders right after the price, moving them gradually to the breakeven zone.
- Determine a profit/loss ratio in advance. They need to be balanced out in order to reduce your losses during an unfavorable market development. If you cannot achieve a favorable ratio, you should not open a trade.
- Work on several trading assets at the same time. Some open short-term and limit themselves to stop orders executed when a specified level is reached. Stop orders for trend positions are placed for a longer period. The position is maintained if price movements are insignificant.
If the trade develops negatively, the trader can fall into the "credit pit". Most often it is caused by high leverage provided by the broker. This option is very risky and rejecting it is one of the first ways of avoiding huge losses. Increasing leverage increases the risk of large losses, even if the trend change is minor.