The forex market is the largest financial market in the world with a readily accessible threshold for entry, thus enticing forex dealers of all levels, ranging from beginners to experienced and well-seasoned professionals to gain profits from the differences in the relative value of currencies and forex rate fluctuations. Though traders' significant participation is attributed to easy access to the market, considerable leverage, and relatively low costs, the absence of correct forex risk management techniques is responsible for quick exits after experiencing losses and setbacks.
The relevance of employing proper risk management techniques is not constricted to businesses with dealings in forex, but also forex traders for whom concerns regarding risk management are generally at the bottom of the barrel. Risk management for traders usually ranks pretty low in their priority list compared to other online forex trading components like finding a better indicator or more accurate entry signals occupying their minds. However, a proper understanding of forex risk management's importance and knowledge is synonymous with a profitable trading experience as comprehending how to manage risks, size positions, etc. are critical to building a profitable forex trading foundation. Here are the ten tips to improve upon risk management and incorporate effective forex risk management strategies:
Utilising a Stop Loss
A stop loss is a tool that can fortify traders against unforeseen market movements, albeit not serving a complete guarantee of no slippage from happening. Employing stop loss encompasses setting a predetermined price at which the trade will automatically stop. During market movements contrary to your judgement, your trade will be closed when the asset decreases and hits the stop loss price preventing further losses. Common types of stops include volatility stop, margin stop, chart stop and equity stop with a prevalent general understanding of setting stop loss at levels that will not allow one to lose 2% of their trading balance for any given trade.
Secure profits with a Take Profit
A take profit works in a manner opposite to stop loss wherein instead of automatically closing a trade to prevent further losses; a take profit automatically closes trades upon hitting certain profit levels. Having clear expectations for each trade, including the appropriate risk and profit level can help maintain discipline even during the heat of the trade. For a risk-reward ratio of 2:1, with the expected rewards being twice the risk the trader is willing to take, the set take profit could be 40 pips above entry price with a stop loss of 20 pips below the entry price.
Circumventing break-even stops
When a trader moves the stop loss to the entry point in his quest of creating 'no risk' trades, the resultant trade can turn into an unprofitable or disadvantageous one. The break-even strategy leads to various problems, although it is favourable to protect your position. This is because deducing the entry point based on technical analysis is fairly obvious to the professionals leading to price retraces with amateurs being extruded right before the price turns back into the original direction.
Expert position sizing
When it comes to your choice of position sizing, it should not be any random number. A dynamic position sizing involves the determination of when to reduce and increase the position size based on the analysis of different winrate and reward:risk ratio of different strategies. Position size can be reduced for setups with lower winrate and can be increased when winrate is higher. Thus, serving as an effective method of reducing account volatility.
Taking spreads into consideration
Sidelining spreads can lead to significant losses in trading in the absence of proper monitoring as it causes augmented incurred costs. Avoiding instruments and times when the spreads are high can be a measure put in place along with proper consideration of the spreads even when they are just a few pips appearing non-existent to some.
Utilizing daily performance targets
Setting daily goals or performance targets creates two major issues. One is the excessive pressure that comes with it enforcing one with the 'need to trade', and the other is random set up of performance benchmarks that serve no purpose.
Setting trading goals the right way would include focusing on the best possible trade execution and following the specified plan in the short term. For mid-term and long-term cases, planning trades in advance, professional routine, reviewing of trades, spotting trade weaknesses would be included.
Comparing winrate and reward:risk ratio together
Many traders miss out on the relevance of comparing winrate and reward:risk ratio together and deem the figure for winrate as useless. While it alone does not provide any insights but understanding the importance of a combined comparison of it with reward:risk ratio is critical. One doesn't need to have a sky-high winrate. For example, a winrate of 40% only requires a reward:risk ratio of greater than 1.6 while trading profitability.
Take currency correlations into consideration
Controlling one's forex portfolio's exposure becomes better overall upon understanding the forex correlations as currencies are priced in pairs and are linked to each other. A positive correlation indicates a movement in the same direction, whereas a negative correlation dictates that two assets will evolve in opposite directions. To use this to your advantage while forex trading, one can avoid opening several positions that cancel out each other, avoid opening positions with the same base or quote currency, and remain aware of commodity currencies that move according to commodity prices.
Leverages allow one to trade utilizing more money than their initial deposit, which many times magnify traders' desires to make magnified profits and sidelining the potential magnified losses in the process. Temptations to use high leverage in the quest of earning significant profits should be kept at bay as one adverse market movement when you are over-leveraged can result in a huge hit.
Expecting the market to turn in your favour can happen to emotional traders leading to continuous losses, presenting an extreme challenge of adhering to the trading rules and strategies to them. Winning or losing streaks should not affect your trading foundations and the risk management strategies you have in place. Also, remaining prepared for the worst-case scenario that might have happened before can work in your favour by being in a more prepared position to withhold adverse market movements.
The importance of the correct methodologies and strategies can not be highlighted enough for forex trading. Myforexeye services are geared towards resolving all the forex needs of individuals, corporations and traders through user-friendly platforms including the mobile app and web portal. Whether it be daily trading calls that enable one to strengthen their forex trading strategies or access to live rates and high-quality research for expert insights, our array of services allow our clients to enjoy a convenient process while enhancing their forex's value. Besides getting the best quotes for export financing, buyer's credit, supplier's credit, one can also benefit from our forex risk advisory services by accessing our experts via video call or phone call on a transactional basis. Our forex consultancy services engender one to obtain a heightened value from forex by correct risk mitigation strategies and optimal forex rates.
Myforexeye is your destination to get all your forex needs, whether it be individual or organizational and irrespective of their scale, resolved. Our Specialized team is armed with advanced technology and expertise of experienced professionals to extend convenient solutions that simplify forex for you while dispensing important information and quality research. Our user-friendly web portal and mobile app reinforced by our transparent streamlined process and service empower users to make savings and insight into real-time rates and best quotations from banks to equip you with the best possible options. One can also mitigate their forex risks through our expert consultation and risk advisory services available on a transactional basis and available whenever the need for it arises.
Speak to one of our specialists to acquire a detailed understanding of Myforexeye forex services.
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10 Mar 2021 05:00 PM
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