5 Ways to Manage Risk
If you are a new trader, it is possible that all this information you’ve just got might make you feel like you know almost everything you will need to know to trade currency.
First of all, unfortunately, that is far from the truth. You are only beginning to scratch the surface. So there is a lot of learning to do. We do hope the rest of our course will take you at least halfway there.
But even when you’ve learnt all you can possibly learn the market will continue to surprise you because you cannot possibly apprehend all its next moves. Some losses are inevitable. Every single trader bears them.
The smart thing to do is have proper controls in place so they don’t affect your income situation too drastically and you can still sustain yourself in the market.
Remember that in trading, as in almost everything else in life, risk is always involved- in every single trade. It is only the management of this risk that translates into success.
Given below are some useful measures that you can take to ascertain security
1. Figure out how much you CAN risk
Plan your investments so you can trade more. At the beginning you can start as small as 1% risk. This would mean that you’ve got the remaining 99% to still trade with should you lose that 1%.
As you gain more experience and confidence you can put bigger percentages at stake but even so we don’t suggest something like 10% of your balance at risk. This would mean that ten consecutive losses will fully drain your account.
2. Use suitable lot sizes
This means that once you have determined the risk you want to take or which fits your strategy, choose lot sizes accordingly. The most commonly traded lot is the standard one which has 100,000 units of a currency. This does not have to be your default for every trade though. If mini or micro lots let you take the kind of risk you’re willing to take then trade with them.
3. Look out for the weekend gaps
Even though there is no trade during the weekends, the political environment may change or there might be a weather related happening that changes things or anything else really. These changes will affect the currency rates when the market opens again.
The gap would mean that the price did not follow a trend and so did not give your stop loss a chance to kick in when the price moved against you. To avoid such unpleasant surprises, we recommend that you try and avoid this gap by closing trades or using a strategy that allows room for such anomalies.
4. Take informed decisions
Watch the news, look at charts; do what you can to prevent a loss that could’ve been prevented with knowledge of the market at that time. Both methods of analyses stated before can be used for this purpose and we recommend that you get comfortable with both.
5. Choose the right time
In Level 1 we discussed time and the different zones from which the forex market functions. There are optimum times to trade when the market is most active (for example when the London trade day begins) and so you would want to be there to catch profitable trades.
There are still times when something influential happens in the world and trades are affected by it. For fear of losing your shot at these prime opportunities, you might want to stick around for the full 24 hours, but you’d have to be a robot to do this. Well, there are bots available to trade on your behalf for the full 24 hours.
If you don’t trust the bots, we suggest you rely on trailing orders. As you already know (if you’ve been reading thoroughly), trailing stops allow the profits in if the market moves in a favorable direction for you and if it doesn’t then it prevents any big loss by exiting the trade timely.
Profits and losses in forex are all a matter of probability. Both are always possible. Therefore, if you’re in it for the long haul, the best thing you can do is to develop a strategy that suits you best and manage the risks you’re taking.
If you want to learn more about strategy development then read on since we have a whole chapter dedicated to it. For now, this is the end of Level 2. We hope you were able to understand Forex a bit more through these lessons.
See you at the finish line!