How to manage risk
Risk is a constant in the world of online trading, as it is with any investment. Now that we’ve covered a few of the risks involved with spot forex, let’s look at some ways you can manage them.
Diversify your investments
Imagine if you took all the money in your trading account and used it to trade a single currency pair. If the price were to move against you unexpectedly, you may lose all your investment and maybe even more.
One way to handle this is to spread your money across a range of currency pairs, otherwise known as diversification. Now, if the price of one of the pairs you were trading were to move against you, your account wouldn’t be entirely at its mercy.
Of course, diversifying across currency pairs won’t protect you from risks that affect the entire forex market. For this, you may want to consider investing in other financial assets as well.
Determine your risk per trade
It’s important to calculate how much you’re willing to risk before entering the market, which is something that can vary depending on your circumstances.
For example, available capital can influence how much risk you’re willing to take. A trader with less money may want to be cautious, whereas one with more may be happy taking risks. Your strategy may also have an effect. If you place a lot of trades daily, you may want to consider trading small amounts each time. However, if you place a few per month, you may be comfortable trading larger amounts.
Risk per trade can have a major impact on your account. Say you start with $5,000 but suffer 10 losing trades in a row. With a risk per trade of 2%, you’d lose less than if your risk per trade was 10%, giving you more of a chance to build your account back up.
Use the tools at your disposal
There’s no magic tool that can eliminate all risk from trading. However, there are a few that can help you manage it.
We’ve covered stop loss and take profit levels before, and they are two of the most common risk management tools traders use.
Stop loss levels can help you materialize your risk per trade strategy. Say you’re willing to lose 2% on each trade. You can calculate what that means in terms of price using one of our forex calculators and place a stop loss at that level. If the trade goes against you and the market reaches or surpasses the price you chose for your stop loss, your stop loss will trigger and should prevent you from losing more than that 2%.
Take profit levels help you lock-in any profits you make, protecting them against unfavorable movements. Just calculate your profit per trade and set your take profit at the relevant level on the chart. Once reached, your trade will close automatically, securing your earnings.
However, always keep in mind, neither stop loss nor take profit levels are guaranteed and, in volatile conditions, they may not execute at all.