The most effective tips to manage risk in forex trading
Beginner currency traders often believe that the reason they end up losing most of their trades is because of their inexperience with the markets and the volatile nature of currencies.
While this may definitely be accurate, the truth is that regardless of skill and experience, risk management tools are available to all traders and taking advantage of them can help with avoiding or at least minimizing losses, securing profits when possible as well as having a more laidback and satisfying trading experience.
What are the risks?
The forex market is truly one of the most volatile financial markets and these rapid and unexpected price fluctuations can prove to be disastrous. However, market volatility isn’t the only thing you need to be wary of and in fact, volatility is what makes the forex market one of the most profitable and attractive markets to trade.
Another factor that poses risk is leverage and some traders fail to account for how it exponentially increases your exposure to downside risk when trading with high leverage. While leverage is a major benefit to traders, it also makes each pip movement more valuable and can sometimes lead to margin calls and stop-outs even if the market barely moved at all.
Also, while the forex market may offer deep levels of liquidity, some currencies are less actively traded than others which may lead to longer execution times and therefore worse pricing. Consequently, trading illiquid currencies can result in lower profits due to the higher spread as well as worse execution price due to the execution delays.
In a nutshell, there are several risk factors that you need to consider before even accounting for any errors and miscalculations on your part. However, there are some ways you can protect yourself and your account during trading which are outlined below.
Perhaps the most important method of ensuring you succeed in trading is to educate yourself on how the market works as well as what tools are available at your disposal.
If you are interested in expanding your knowledge about the latest forex trading strategies and market developments, you can head over to our Education portal which includes several learning materials and resources such as forex articles, on-demand videos and webinars.
Every CM Trading client also gets assigned with a personal trading specialist who can provide assistance and training if required.
When you achieve a basic level of understanding, you can put your skills to the test using a free CM Trading demo account, through which you can trade the markets using virtual funds and zero risk.
Use the stop loss and take profit parameters
Employing the stop loss and take profit parameters, available in the trading platform, guarantees a favorable exit regardless of the outcome. A stop loss is your first line of defense when the market doesn’t move in the direction you predicted; in which case it closes the trade automatically before any further losses are incurred.
On the other hand, a take profit order ensures that your profit is secured regardless if the market stops moving in your favor. While sometimes, you may feel disappointed that a take profit target closed the trade prematurely where more profit was available if you held your position open, at the end of the day what really matters is that you closed the trade in profit, your analysis was correct and didn’t have to risk losing it all for a little higher return.
Diversify your trading portfolio
Forex traders have access to hundreds of financial assets through their trading platform and while not every currency or commodity can prove to be profitable, trading different markets can prove to be quite beneficial when one of them starts to flip from an uptrend to a downtrend of vice versa.
While forex trading allows you to both buy or sell a trading instrument and profit even when the markets are collapsing, if both the markets you are trading end up bouncing back, it can lead to excessive losses.
For example, exposing yourself to positively correlated markets which tend to mirror each other’s movements such as is the case with gold and the USD, can result in twice the loss when they move against your position.
Open a CM Trading account today to discover the best risk management solutions and trade with the most profitable trading conditions available.