Risk is everything in trading forex on line. We make profits by assuming risks, and the lifetime, and success of our careers depend entirely on how good our risk management skills are. Of course, the management of risk is a vast subject studied by trading professionals and academics constantly, and it is impossible to cover every aspect of it in detail in this brief article. Fortunately though there are a number of convenient tools which can be used by a retail trader in controlling risk.
1. Trade size
You can’t manage risk unless you have a methodical approach to trade sizing. Even a simple, constant trade sizing method is much better than an arbitrary sizing of positions at the trader’s whim. Not even the best technical tools will help your trading much, and you can congratulate yourself if you can just reach the break even point with random position sizes.
2. Leverage
Leverage is all about controlling your risk. If you believe that the scenario in your mind has a high likelihood of coming true, a higher leverage ratio may perhaps be acceptable, but even then, you should compensate for the increasing risk by either adjusting the stop-loss order, or using a smaller trade size. In general, beginners are advised to avoid the use of high leverage altogether, and to raise it only slowly over a period of time.
3. Stop loss orders
Stop-loss orders are of course the most important aspect of managing a position. The accepted wisdom among traders is that a maximum loss of two percent is a good and prudent risk for most trades. If you feel exceptionally confident you can raise it up to five percent, but it should not be very often.
4. Take profit
Of course we don’t trade just to stop-losses. The take profit order is just as important as the stop-loss order at times, as it helps us compensate for our smaller losses with larger profits generated in a few well-placed, longer-lasting successful positions.
5. Discipline
The keyword in all this is discipline. Unless these rules are applied with rigor and commitment, it is all idle talk and little more. Arguably acquiring this disciplined approach in trading is the hardest part of the task. Only a long period of practice will ensure that we acquire the correct, disciplined attitude in the application of risk controls.
Combining good risk management methods with a competent and reliable forex broker will result in a rapid change in your performance. It is often the case that someone acquiring these skills will move rapidly from being a pessimist to a confident trader, as he feels that he’s in control of his trading. You control your decisions, so you can ensure that you trade in such a way as to be perfectly positioned to exploit your successes when they occur. Losses will of course happen from time to time, but you know that you can manage them, and when fear is gone, and profits will come!