Forex risk management is defined a set of steps or strategies that can be used by traders for minimizing their risks when they are trading foreign currencies. Risk management is an essential element of every forex trading strategy and it is one of the most important skills that every trader should master from the beginning. The primary purpose of a risk management strategy is to limit all your loss-making trades while maximizing your profitable trades. So, how do you go about minimizing your risks for trading forex? Some of the best ways to do so are mentioned below:
- Use stop losses
The first thing that every forex trader can do is to use a stop loss, which is a trading technique designed to take you out of any losing trades at a predetermined level. This can be a great way to limit your losses to a specific amount. Stop losses can be utilized for a 1:1 risk-reward ratio or higher in every single trade you make as this will keep your losses under minimum and help you maximize your profits. If you go with a 1:2 risk-reward ratio, it will ensure that you can still earn solid profits even if you have mostly losing trades. If you are an aggressive trader, you can go with a 1:3 risk-reward ratio. Every legitimate broker, such as Pibexa, will enable you to set stop losses with your forex trades to minimize your risks.
- Go with proper lot sizes
A forex trader’s success depends on the use of proper lot sizes. This is because the lot size determines the value of every point of the currency pair you trade. A standard lot usually refers to 100,000 units of the base currency you trade. Thus, if you trade a standard lot of the EUR/USD currency pair, then the value of every point would be USD 100. You should use lot sizes according to the amount you want to risk in every trade, which directly depends on your risk appetite and the size of your account.
- Keep losses under control
When you open a trade, it is best if you only risk 2% or less of your trading account on every trade. This ensures that you are able to survive any losing streak and also minimize the reduction of your capital. Bear in mind that forex trading losses are not linear. This means that a 50% loss would need a 100% gain for you to go back to your original trading account level.
- Be careful with leverage
Most of the authentic trading brokers like Pibexa offer their clients the option of using leverage. While there are a ton of benefits to be enjoyed when you trade with leverage, it also increases the risk of losses in case it is used incorrectly. Leverage acts as a ratio, which means that if you trade with $10 and your leverage is 1:50, then your investment is actually $500. Hence, if you have a profitable trade, these profits would be 50 times bigger than they would have been, but it also means that your losses would be magnified as well.
- Select the time of the day that you trade
A lot of forex traders don’t take into account the impact of the time of day they trade at. It is a fact that traders who are active during times of less volatility tend to make more profits than those who are trading during high volatility periods. The high and low volatility periods can vary for every currency pair, but are generally referred to as the opening hours of the London/European sessions, Asian sessions and the New York/American sessions.
- Be careful of the news
Forex traders like to stay abreast of all the news that can have an impact on their market, but it is difficult to do so as it is impossible to predict what will happen at any given moment all over the world. However, experienced forex traders take the time to keep an eye on economic releases from various countries that generally have an impact on the currency pairs they are trading. Try to make trades before the release of the actual news in order to maximize profits.