In this article, we will discuss several tips about forex risk management strategies and techniques, as well as offer a few money management hacks and simple tools to help you towards embracing a risk management tactic to pair along with your trading strategy.
Trading is a profession built on the premise of making decisions without knowing what the effects and outcome of those decisions will be.
We can do our best to be right more often than we are wrong. However, being wrong and failing is an unavoidably large part of the trading game.
These failures become especially dangerous since once we are in a trade, we’re left with very few things we can do to alter the course of the trade. This is why risk management or money management needs to be an essential component of any trader’s guide to success.
As a subset of your trading plan, that’s where forex risk management strategies begin and where every good trader’s guide will begin too.
Effectively mapping out and planning your trading strategy is the first line of defense when it comes to building a solid forex risk management strategy.
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Before you begin trading, do your homework and make sure whichever broker or prop firm you’ve decided to go with is right for your type of trading.
Once you’re technically ready to start trading, you should employ the service of stop losses to make sure trades, once placed, will not spiral out of control and wipe your entire account out. Know the price you’re willing to pay and the price you’re willing to sell out. Don’t put yourself in a position of figuring this out as the trade develops.
Use calculators to calculate pip value or the position size calculator. These valuable tools can help you adjust your stop loss in order to cap it below the maximum loss you are willing to take for the trade.
If you happen to enter a trade without knowing where you want it to go or where you’re comfortable letting it go, it’s easy to fall into a gambling mentality. You might win a bit, so you decide to stay in longer and let it ride, or conversely, you might lose and decide to hang on longer in order to win your money back.
Trading is not gambling, and this is a surefire way to a short career and the end of any trader’s guide.
Ok, well, don’t turn it off entirely, but our next risk management tip is to at least mute it now and then. By not trading during news release times, you can help yourself to avoid the turmoil of high amplitude volatility that follows a major news event. This volatility can hit your stop orders, extend your spread, cause unwanted execution of orders, and execute trades with slippage.
It’s pretty easy to avoid these news releases because most of the events that will greatly impact the market are scheduled ahead of time. You can find all the important announcements here. There are also indicators available that can alert you from the chart of your trading plan.
Always be aware of your trading strategy signals, and don’t take risks if your strategy indicators tell you to abort your plan in order to do so. Listen and trust your dashboard with no discretion, and it will ultimately keep you safe in the long run.
In addition to following the closely laid out plans on paper, don’t forget about the intangibles that your mental and emotional state bring to the table. Don’t trade when circumstances aren’t letting you get into the trading zone. If you’re tired, sad, feeling a bit off, don’t fight it. Accept that it’s not your day, and get back at it when you’re back in balance.
You need to know yourself very well in order to listen and understand what the mind tells you. Avoid risks that come from trading in a state of poor judgment.
If you’re already in a trade when you notice your mood taking a change for the worse, do everything necessary to minimize exposure in order to keep risk under control with a final, tolerable loss.
Now that you’ve planned and put yourself in the best position to start making trades, a good general rule to get started with is the half percent rule. This is a commonly accepted rule that states you should never put more than o.5% of your total capital into a single trade.
As your account grows, so will your position size. It’s always important to keep an eye on that size and, for larger accounts, not go above 2%.
Finally, a really good way to make sure you don’t go bust in a quick instant is to diversify your investments.
If all of your capital is in one stock or asset, while the potential for making exponential amounts of money is there, the risk surely outweighs the reward. After all, success in trading means playing the long game, not going for the home run on every single trade.
You need to be able to stomach the losses because they’re sure to come almost as frequently as the wins.
As we stated in the beginning, the best trade security is a well thought out and executed a trading plan and a good trader’s guide.
A trading plan that takes into account risk and money management will leave you in the best position to prosper while not being devastated from your inevitable losses. Prepare yourself and leave the improvisation to the stand-up comedians.
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