7 Easy Forex Risk Management Tips
Forex is an extremely risky endeavour for the unprepared so we always encourage those new to trading to always stay away from the high risk moves that wreak havoc on a portfolio. The system is actually set up in a way that makes it extremely risky so it’s important to have a risk management plan in place.
Here are 7 easy Forex risk management tips that will help you be a successful trader.
1: Keep Leveraging to a Minimal
Leverage is one of the most powerful tools in investment, but it’s also quite risky for those who don’t truly understand it. Misusing leverage can land you in a lot of trouble. Leverage might multiply market gains but it does exactly the same for losses. The more leverage, the less room there is for mistakes.
2: Set Stop Losses Correctly and Take Profits
Setting the correct stop loss is an important decision that we see so many traders take lightly. Beginners sometimes set this at an arbitrary number, or worse – they set it based on the total size of their portfolio, creating an all of nothing gamble. Exiting a trade at the right point will make the difference in whether you’re successful or lose all of your money. When a trader starts guessing their limits, then they are using a losing mindset.
3: Trade Within Higher Timeframes
Trading within shorter timeframes is appealing to many beginners, but it’s more stressful and less profitable. The minute charts are volatile and completely unpredictable. Any money that’s made will involve luck more than skills. Furthermore, there are higher trading fees because of the high frequency of trading. In the long-term, it’s better to stick to trading within higher timeframes.
4: Find Reasons Not to Trade
Traders are bombarded with messages every day pertaining to financial news. These reports tend to scream buy or sell and it seems like everyone else is out there making money. One of the biggest challenges is learning to make objective decisions within a noisy market. Look for reasons not to trade. Ask a lot of questions. Always plan for the unexpected. There is a proven link between over trading and under performance.
5: Don’t Trade Based on Big Economic Announcements
There is an economic announcement almost every day, but when you hear a big announcement then you need to treat it with caution. Surprise announcements can send markets into a spiral. Inflation and job reports can cause huge impacts across several markets. It’s easy to trade around these types of events if you’re day trading. If you’re holding a longer position when surprising news hits the market, you can always hedge to soften the blow or close out of the trade completely.
6: Trade Markets with Low Correlation
It’s a good practice to set limits on risks with all of the trading positions you take. However, if all of the holding in your account move in the same direction, then you’re going to have way less protection. Many of the different markets are going to have high correlations. What this means is that when one trends in a certain direction, then other markets will do the same, so trading within different high correlation markets does not provide enough diversity.
7: Set Realistic Goals
Returns with any type of financial trading can be unpredictable so it’s important that you set clear, realistic goals. Most traders enter with the goal of making as much money as possible, as quickly as possible. This is not good enough because setting vague, unrealistic goals like that will cause you to take higher risks. When starting out, your goal should be to simply break even every month. Then you can increase it over time as you learn the market.
Author Bio:-Jacob Haney is a content marketer presently working with Research Optimus, a business research outsourcing company. A writer by day and a reader by night, he is loathed to discuss himself in the third person but can be persuaded to do so from time to time.