Managing your risk is very important in currency trading because it helps you cut down your losses, determine your maximum exposure, and contribute largely to your success as a trader.
Understand that speculative trading involves some degree of uncertainty; you are never certain of the outcome of any trade.
By doing proper research and analysis, you can find quality trade ideas that have a high probability, but it does not completely take away the possibility that you can still be wrong.
Your ability to identify, accept, and manage risk is key, and it will make a huge difference in your trading experience.
A lot of traders know they need to manage their risk, as a large percentage of trading educational resources involve content around risk management, so it is not a new concept, but accepting risk is something that some traders have not come to terms with.
You need to accept the risks that come with speculative trading; you can’t win all the trades.
Accepting the risk and the possibility of taking some losses will help you cut your losses short instead of holding on to losing positions too long or, even worse, adding to them.
It will also help you maintain better emotional control because you can easily admit when you are wrong.
The forex market has inherent volatility and uncertainty, and as such, professional traders limit their market exposure.
The idea is “just in case I am wrong”. You should be more concerned about your money than what you are trying to make from the market.
How can you manage your risk?
- Always set a Stop loss. A stop loss is an order to close your position if the price goes against you to a certain level. It is simply the maximum amount that you are willing to risk in the market. You should always set a stop-loss on all your trades.
- Trade Appropriate Volume: The volume of your transaction should be appropriate for your account balance. Bigger volumes increase the profit potential, but they also increase the risk. Stay within your means.
- Avoid Overtrading: Do not treat trading like a routine; only take high-probability trades when you have them, and when you don’t, stay out of the market.
- Cut Losers: When a trade is not going in your predicted direction and it is clear it is likely to continue, cut it. Do not hope that it will reverse; hope never moves prices.
Lack of adequate knowledge and experience contributes to losses among struggling traders, but a lack of proper risk management does the most damage in the shortest time.
“Risk comes from not knowing what you’re doing.” Warren Buffett
This quote sums up everything: you must know what you are doing.
You can click on the link to learn more about risk management in CFD trading.
