Forex trading training tutorial: managing risk
Risk management is a powerful tool and an essential skill that all forex traders need to hone from the very beginning of their forex training. Learning how to effectively manage your risk exposure in the foreign exchange markets will not only help protect your invested capital but also guarantee long-term success with a consistent trading strategy.
In fact, if you want to start trading forex as a means to generate additional income or even make it your full-time business, it’s important to ensure that your entire strategy revolves around risk management. This is the only way to survive the unpredictable market climate and unavoidable losing streaks as a beginner trader.
Every forex training course will – or at least should – emphasize the importance of risk management concepts such as stop loss and take profit orders, market volatility risks as well as the risks of leverage and margin trading.
Volatility: risk and opportunity in equal parts
If you sign up for free forex training seminar or course, you will soon come to learn that forex involves trading currency pairs and currencies are inherently an extremely volatile market. This volatility, however, is what makes forex so popular albeit not suitable for all investors.
Active markets are profitable markets. If the price isn’t making movements, there’s no way to benefit from a price spike or drop. Price jumps in the exchange rates between currencies are what offer speculative forex traders the exciting opportunity to profit.
However, it’s also true that volatility creates risk as well as it exposes your capital to an unpredictable market where the investor's sentiment could deteriorate at any time and the price can move against your position quite unexpectedly.
Thankfully, the retail forex industry has advanced so greatly these past few years that individual traders now have more than enough tools in their disposal – with and without the trading platform – that help safeguard their investment and reduce downside risk.
Being fluent in technical analysis and price action is extremely beneficial but your forex training in money management should start before you even download the platform.
As already mentioned previously, the forex market is very unpredictable, and trading involves a high amount of risk. No one can consistently anticipate the market’s movements reliably all the time. Therefore, some losses and losing streaks are inevitable, especially when you are just starting out and as such, it’s highly advised that you only invest a modest amount that you can afford to lose.
If you are already registered with a forex broker and have an account with enough trading balance to open positions, you should start thinking about your position size.
Since forex is traded in lots, you need to be able to tell how much money you are risking depending on the lots you are trading. It’s also important to note is that a standard forex lot is equal to 100.000 units of currency and there are brokers who offer an account with mini, micro and even nano lots that translate to 10.000, 1.000 and 100 units respectively.
Trading with standard lots requires a high amount of trading capital and each pip you gain or lose is worth much more as well. Trading standard lots in EUR/USD for example will net or cost you approximately $10 for each tick the exchange rate moves. This translates to hundreds of dollars of potential profit or loss in mere seconds depending on how fast the market moves.
Whereas in the same scenario, if you were trading the EUR/USD with a smaller lot size i.e. mini lot, you would only be risking $1 for each movement. The profit potential drops significantly but so does your risk exposure.
Smaller position size may seem counterproductive when your objective is to make as much as money as possible in the shortest timeframe, but you need to remember that losses are inevitable in currency trading. Therefore, the best approach to consistent success is to limit the amount you are risking with each trade in order to reduce your losses and make your winning trades more effective.
Stop-loss and Take profit parameters
While you are opening a position in the currency pair of your choosing, the platform offers a variety of options and parameters you can select for your trade. You can select the number of lots you are willing to trade as well as the “stop-loss” and “take profit” limits.
There are countless forex training courses about these two features of the trading platform because of their importance in managing your downside risk. Put simply, a risk management strategy can’t be effective without a stop loss and any amount of money you are currently winning from an open position could be just as easily wiped out if you forgot to set a take profit limit.
This is because a stop loss indicates how much you are willing to risk for a particular trade. If the exchange rate of the currency moves below your stop loss, the trade is effectively closed and while you may lose the amount you invested for that position, the rest of your balance is secured.
A losing trade without a stop-loss order will continue to cost you money until your trading balance has run out. Unless, of course, you are lucky enough and the price turns around and starts moving in the direction you initially predicted. Therefore, while stop loss placement is important, it’s equally vital that you don’t place it too close to the current price in order to leave some breathing room for price jumps in either direction.
Similarly, a take profit limit will automatically close your position as soon as you hit your profit target. Again, closing out a winning position may seem counterintuitive, but at least you would have secured your profits before the market changes direction and moves against your position.
While developing a solid risk management strategy is clearly the most efficient way to succeed in forex, most traders spend too much time looking for a forex training course with high probability setups and holy-grail signals.
The best way to learn how to trade is by taking the time to practice and put your strategy to the test. Thankfully, all forex brokers provide clients with a no-risk demo account where you can trade with virtual money and learn how to trade confidently.
A forex trading training seminar or workshop can be helpful in guiding you through the basics but actively trading and employing risk management tools like stop loss and take profit parameters through the platform can accelerate your forex education.