Business & Economy

Wednesday, 15 April 2020 11:35

How to Manage Risk in Forex Trading

Written by 
Forex Trading Africa

Risk management is the one thing that separates professional forex traders from retail traders who are not making money. The forex trading platforms offer risk management tools designed with the aim to control the risk to traders. However, many traders, especially those that are novices tend to overlook the importance of managing one’s own risk.

The greatest investment that you can make in your understanding of how the forex trading market works and the associated risks is in trading education – video tutorials, webinars, etc. Here are ten valuable strategies to introduce you to manage your risk in forex trading. To know how to manage your risk in Forex Trading is a vital part of your overall trading strategy here are the best management strategies provided by Forex Trading Africa & Forex Trading, South Africa.

Top 10 Risk Management Strategies

  1. Know how to hedge your Forex positions.
  2. Ensure that you make use of a proper position size calculation process to calculate the correct lot size.
  3. Restrict yourself to only trade during more profitable periods; To do this - keep a trading journal so that you can record more profitable trading times (hours, days & weeks)
  4. To create a balanced forex portfolio you have to diversify across many currency pairs, but refrain from diversifying too much.
  5. It is important that you set an optimal Stop Loss level and check that it is correct.
  6. If you are a beginner trader, avoid the exotic currency pairs and rather opt for trading the more predictable pairs.
  7. Stick to trading and investing in assets that you do understand; this means investing in trading education and doing research.
  8. Determine what the maximum drawdown or risk per trade is.
  9. Always maintain an appropriate Risk to Return ratio; The ideal is 1:1 - meaning the risk is equal to the reward.
  10. Use leverage that is appropriate - even if higher leverage is offered, refrain from using it unless you are sure it’s the right thing to do (the maximum leverage for beginners is 1:20).

The foreign market is one of the most traded markets in the world. According to the estimates by The Bank of International Settlements over USD 5 trillion is traded every day on the forex exchange market. It’s a leveraged product, which means that most traders borrow money to trade, making it one of the highest-risk instruments on the market. The Forex exchange market has a very low barrier to entry, This means that you can start trading forex with initial small capital investment.

You need a basic knowledge of how forex trading works, a stable Internet connection and an account with a broker that offers a free trading platform such as MetaTrader 4. The most important thing anyone who wants to trade on the forex market should consider before embarking on this journey is whether you have an appetite for risk and the financial capacity to carry possible substantial losses.

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