It is a common thing for every new trader to think that making money through online forex trading is stress-free.
Making money through forex trading is a steady process that takes time, dedication, and devotion. These three keys are vital for every trader if they want to be successful.
It is not possible to open a forex position if you don’t know the right risk management tips before and after your trade.
Without much ado, here are the six useful risk management tips every trader should know about in the forex market.
- Only invest with your spare money
Investing with the money you don’t need is the first step to effective risk management in the forex market.
Hence, risk the money you can be able to lose, and that won’t affect you. Lots of newbies in the forex market skip this tip because they believe they can’t encounter losses in the forex market.
Trading may look like gambling – don’t take unnecessary risks all the time. This is because it is possible to lose your capital when you trade, thus, mounting lots of pressure and fear in you, making you compromise your decision making. It is also essential to know that the forex market is highly volatile.
- Know your risk tolerance
Before you start to involve yourself in the forex market, you must know your risk tolerance level, depending on your age, knowledge in forex trading, experience, etc.
By knowing your risk tolerance level, you will be able to make better decisions and trade wisely. When you invest within your risk tolerance, you will limit the likelihood to run to risks.
- Fix your risk ratio or reward to a least of 1:3
Setting your risk ratio or reward will help you improve your profit in the forex market as a trader. Risk ratio or reward measures and compares a trader’s distance between the entry point and stop-loss and take-profit.
For instance, let us say a trader invests in the EUR/USD. If his distance between his entry-level and his stop-loss is 100 pips and the distance between his entry point and your take-profit is 300 pips, then the trader used a risk or reward ratio of 1:3, due to the fact that he risked 100 pips to get 300 pips.
- Control your timing
In the forex market, it is necessary always to determine your timing. There is nothing more infuriating than losing a potentially successful trade due to the fact that you were not available when the opportunity arose.
This means that you have to be available to seize every opportunity that comes up in the forex market.
However, to control your timing, perhaps 4-Hour, 8-Hour, or Daily charts will be an excellent way to start managing your timing.
Again, you can make set trailing stop orders to allow you to make profits when the market price moves in a favorable direction. Still, it ends trades if the market immediately moves in a negative direction.
- Regulate your risk per trade
Let’s say your forex trading account has $10,000, then the maximum loss per every trade that is permitted is $200 per trade.
Nevertheless, controlling your risk per trade will help you go through a losing streak so that you can protect your capital and prevent the market downside.
- Always consider currency correlations
Due to the fact that currencies are priced in pairs, every trader must consider currency correlations to manage risks.
To do this, you need to avoid opening lots of positions that may cancel each other and positions with the same base currency.