- Only trade money you are willing to lose –This is the fundamental rule of trading that is often broken, especially by new forex traders. But this only puts them in an unnecessary position of vulnerability. The forex market is highly volatile, and it is very much possible that one may lose the entire trading capital. Moreover, trading with funds you cannot afford to lose will put extra emotional stress and pressure on you which may increase the chances of you making wrong decisions.
A good rule of thumb is to only risk between 1 and 3% of your account balance per trade.
- Understand the forex market – Whether you are a beginner or an experienced trader, it’s always a good idea to educate yourself with the upcoming trends of trading and gain a deeper knowledge of the risks associated with the forex market. If needed, take help from the various articles, videos, and webinars available on forex trading to keep yourself informed.
- Use stop loss & limit orders – Stop loss and limit orders refer to the instructions given to a broker to close a trade when the market price hits a certain level. Therefore, if the price of an asset hits the stop-loss level, the trade will stop to prevent further loss. However, there is no guarantee against slippage
- Leverage – Leverage in forex allows traders to make more profits from their accounts, but it also increases the chances of losses which elevates the risk factor. That’s why we recommend you manage your use of leverage wisely.
- Set a risk-reward ratio –The risk you take with your capital should be worthwhile. Therefore, you must set a risk-reward ratio to qualify the worth of your trade. It will further improve your chances of gaining better profits in the long run.
To find the ratio, compare the amount of money you’re risking on an FX trade to the potential gain. We suggest a RRR of 1:2 for scalpers and day traders and 1:3 for position traders.
- Manage your emotions – As we all know, the forex market is extremely unpredictable. If you let your emotions like fear, greed, or boredom rule your decisions, it may expose you to undue risks.
It is seen that emotional traders often struggle to stick to trade rules and strategies which lead to heavy losses. Hence, we suggest you refine your trade strategies based on previous data rather than your feelings.
The scope of risk management in forex trading is so large that we can go on and on. If you need more tips, connect with our team of professionals at VFM Brokers.