Tips to Reduce Risk in Forex Trading
Forex is set up to be a rather risky Endeavour. We always encourage new traders to go easy on the risk as they get started. Here are 7 tips that will help to reduce risk in forex trading when trading foreign exchange market and any other market.
7 Tips to Reduce Risk in Forex Trading
1. Keep your Leverage Low
Leverage is a powerful tool in Finance. Like, if misused it can get you into deep trouble. While leverage will multiply gains, it will also multiply losses. The higher leverage is, the less room for the mistakes
The amount of leverage set the position sizes that you can control. A leverage ratio of 100:1 means that every $100 of own money can control a position worth $10,000.
It allows you to create higher returns on investment then if you had put all of the money up front yourself.
Put another way this is like buying a $100,000 house with $1000 deposit. The deposit is your equity.
If the price of the house rises just one percent to $101,000, you will double your equity. But one percent fall in price would take your equity down to zero.
2. Set the Right Stop Losses and Take Profits
Setting the right stop loss and take profit is the most important decisions in the entire trade setup. But too often, the stop loss and take profit are set arbitrarily. It might be set at a fixed size for every trade to cap the loss at a certain amount. Or worse the stop loss might be decided merely by the amount of money in the account in an ‘all or nothing’ gamble.
The decision on where the trade exit should factor in the state of the market and the length of time the trader is prepared to wait for a profit. Setting right stop and take profits will lower risk and lead to better and more consistent trade outcomes.
Click on Below Link: Forex Trading Risk Management for Beginners
3. Higher Timeframes
Trading shorter time frames are more stressful, time-consuming and in most occasions, less profitable. The minute charts are more volatile and changeable in relative terms. High-frequency trading also acquires more trading fees because the ratio of spreads to profits is correspondingly much higher than for strategies that hold positions for the longer duration. Slippages will also be proportionately higher.
The longer time frames, such as the hourly chart, 4 hourly or even daily charts can provide more certainty on which to plan trades. Fees and slippage are also proportionately lower.
4. Reason for Not to Trade
Most of those involved with trading get the daily messages telling of events in financial markets. The charts seem to be screaming buy or sell. Everyone out there looks to be making money.
When a trader has money sitting idle in the account, it can be tempting for them to place orders. At least then there will be some action.
Remember that brokers don’t care if the markets go up or down. It’s not their money at risk.
Thinking clearly and objectively between all of this hype is one of the biggest challenges facing a trader. Always look for a reason not to trade.
5. Avoid Trading in Big Economic Announcements
Rarely a day goes by without some economic announcement or other. But the largest ones need to be treated with care. Surprise announcements from central banks such as unexpected changes in interest rate policy can send the markets into a tailspin. Jobs reports, inflation figures, and consumer spending data have a high impact on many markets.
Keep a check on the economic calendars. For day trading it’s relatively easy to plan trades around these events. Traders holding positions for longer can use hedging to soften the blow of any potentially big movements or consider closing them if necessary.
6. Trade Markets with Low Correlation
Setting limits on the amount of risk on each position is a good practice. But if the holdings in a trader account all move in the same way, this won’t give any real protection.
Many currency pairs have the high correlations as much as 80% to 90%. It means when one trend in a certain direction the other is likely to as well. So holding a basket of correlated currencies will concentrate risk rather than diversify and lower risk.
When trading pairs with the high correlation, it is worth examining to see if the same end can be reached by trading fewer pairs with the lower correlations. It could help to reduce trading fees as well.
7. Set Your Realistic Goals
Monetary returns in any trading activity can be unpredictable. But having a specific goal in mind does help to focus. The goal for many traders is to earn as much money as possible. But this won’t necessarily keep them on the course or provide them with a realistic scale of progress.
Click on Below Link: Goal Setting & Planning for Profitability
It’s better to set a goal, such as a return on initial investment then use that as a stick to measure headway. These 7 tips that will help to reduce risk in forex trading when trading foreign exchange market.