It doesn’t matter if you are someone looking to diversify their investment portfolio or an individual that is in search of a way to make some extra money, you have probably considered forex. Many people think that forex trading is fast and easy; however, it does require patience and dedication as well as some risk management strategies that will ensure you are not gambling with your invested capital. If you’re in need of some help when it comes to choosing the best approach, keep on reading for some useful risk management tips.
Only Invest Money You Can Afford to Lose
First and foremost, you need to understand the importance of only investing the money you can afford to lose. While it might sound obvious, many beginner traders skip this rule, thinking that the chances of them losing everything are low. Well, you probably know that you should not put all your eggs in one basket, and the same approach works here. Why risk losing all of your capital on one bad trade? Plus, if you invest the money you need for everyday life, you will be under extra pressure and more likely to make a mistake. Therefore, regardless of how small your investment fund is, stick to it to prevent a big disaster, seeing as how the forex market is known to be volatile.
Decide on Your Risk Tolerance
Risk tolerance is something that every trader can choose for themselves. This represents the percentage of the total value of your account that you are risking every time you place a trade. Trading instructors suggest numbers such as 1% or 2%, with the highest being 5%. Of course, you can risk 10% of your balance; however, that means that you might lose everything you have in just 10 trades. Beginners in search of some extra money are likely to take a big risk but don’t be too eager. Start small, with one or two percent. What is more, you can simply stick to the two-percent rule as experts recommend it in most cases.
Learn About the Best Time to Trade
Keeping in mind the fact that the forex market operates 24 hours a day due to international time zones, it is possible that you will miss a potentially successful trade. Relying on a forex robot is a great alternative here but a lot of people don’t feel comfortable letting software make decisions in their stead. Therefore, if you want to make these decisions on your own, you need to be patient, well organized, and dedicated to this goal. These are just some of the skills that Top Online Forex Brokers lists as being vital if you want to be a successful participant in the forex world. You have to determine when you have enough time and when you will be trading, as losing sleep in order to trade at night is surely not something you can afford if you have a full-time job, a family, and other obligations.
Use stop-loss orders
Another strategy that will help you manage the risks you take is using stop-loss orders. This function exists in order to limit your losses and lock in your profits, and it can make a huge difference in your trades. Once a currency reaches a particular price, a stop-loss order will be executed, whether you are buying or selling. There are many benefits to this method. For instance, it costs you nothing, and it might not even be used. It is there as an insurance policy so that you don’t lose excessive amounts of money. However, keep in mind that short-term fluctuations in price can activate the order as well and lead to an unnecessary sale.
Consider Currency Correlations
Finally, you need to learn more about how currencies are correlated. For example, remember to avoid opening positions that cancel each other out, such as EUR/USD and USD/CHF. Then, don’t open positions that have the same base or quote currency – if you go long on AUD/USD, GBP/USD, and EUR/USD, they will all be affected when USD strengthens or weakens. Lastly, you need to be aware of commodity currencies that move according to commodity prices. If the price of a certain commodity strengthens, so will the currency of the commodity producers. For instance, wool and dairy products are correlated with the New-Zealand Dollar and oil with the Canadian Dollar.
By considering and implementing the above strategies, you will be working towards your goal of accumulating funds, as opposed to the opposite scenario. Of course, from understanding leverage and making the most of it to following the news every day, there are other risk management strategies that you can implement as well if you opt for trading on the forex market.
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