How to avoid ‘Risk’ Trade in Forex
Forex, FX, currency trading…whatever you prefer to call it, there is without doubt a significant element of risk involved in the market. Whilst pretty much every trader will have a dealing strategy, the really top traders look at risk separately, scrutinise the danger points and have a specific plan to minimize them. Sounds excessive? Read on to see why risk management is a key part of the way to successfully deal…
Much has been written on the subject of forex trading, with many different strategies out there in the market, with a whole host of techniques utilised, many of which can be learned for free whilst other involve piggybacking onto an existing trader for a fee. Once you have decided how you are going to trade, swing trade or scalping, what currency pairs to follow, you are ready to roll, right? Wrong. Deciding on what you are going to do is only half the story. Deciding what you won`t do as well as what you will do when things start to go wrong is absolutely vital to avoiding high risks.
Every new dealer on entering the market, starts out by thinking they won`t make a loss, maybe just on a subconscious level. However, in a world of rapid movement and unpredictable swings, the only certain thing is that every trader will lose money on some deals. Try to fight against this statistic and you have already lost. The traders that make the most money accept the inevitable and build this into their trading strategy.
It is very tempting to go after the big money and put a large percentage on a `certain` deal. However, the market moves quickly and nothing can be certain. It just takes one rapid swing and all of the profits can be wiped out within seconds. Whilst putting only small amounts of money on each deal will take some time to yield decent profits, it is the way in which to protect the capital. And that is the underlying factor to all aspects of risk management: protecting the capital account.
When a trader goes on a losing streak and have no fear, it will happen, protecting the capital ensures the trader does not go out of business. A streak of 20 bad deals is not good news for anyone but dealing with large sums and having this kind of run could wipe a trader out. Recommended levels for each trade are no more than 1-2% of the capital account. Once the money in the account starts to dwindle it is much harder to build it back up to original levels.
The other point that every good trader adheres to is; don`t forget your trading strategy and have defined stop points. It is very easy to chase a profit, especially if the chips are down, certain that a trade will eventually `turn good` and losses will be recouped. Remember your strategy and stick with it. Losses will be made but eventually, by staying true to your trading plan, there will be gains.
Finally, when determining your currency trading, choose pairs that don`t track each other. The US dollar and sterling have a habit of moving together and whilst this would bring big gains for successful trades, the potential for big losses is also much greater.