How To Minimize The Risk In Forex Trading: Method That Should Be Followed For Minimizing Losses
One of the most expensive mistakes that a trader can make is taking too much risk. When it comes to forex trading, one can lose a substantial amount of their investment if they make such a mistake. The main risks here come from fluctuations in currency rates. Here are some Forex trading strategies to help you minimize risks and losses.
It is important to set a percentage of risk that you would be willing to take per trade. Most traders rarely exceed over 2% of their total account funding. When this limit is exceeded, you should cease trading irrespective of what you think is likely to happen.
Avoid holding positions in two or more currencies that tend to fluctuate in the same manner. This technique is known as correlation. Holding currencies that move in the same direction translates to less gains for traders.
In forex trading, it is risky to make profits by increasing trade sizes. This is mainly because it is difficult to accurately predict the next profitable deal. You should therefore control trade sizes. Avoid taking this trade as a gamble; it takes patience and discipline to succeed in this sector. Traders who tend to increase trade sizes when prices shoot up find themselves losing in the long run.
An effective loss minimization technique is to use stop-loss orders. Their main function is to control or lessen losses. With these orders, One can only trade in a currency pair when the price reaches a preset level.
You also have to understand what technical and fundamental analysis involve. The former focuses on price movements of a currency pair and uses the historical data to predict future price movements. The latter incorporates economic factors. These two will in turn help you analyze the market exhaustively so that you are able to make prudent decisions.
It is also important to diversify risks. You may consider trading two or more currency pairs simultaneously; it helps you diversify the risk you take. However, it takes skill, experience and confidence to exercise this successfully.
As mentioned earlier, forex trading is quite different from gambling. You should therefore avoid using gambling tactics here; successful Forex trading strategies are much more refined. For instance, never add to a losing trade. It does not make sense to add to a loser while hoping that it will start gaining. The odds of succeeding are just too low to risk pumping more capital into a losing trade.
by: Mary Robins