There are certain risks associated with forex trading that every forex trader should always keep an eye on. Traders get tempted to follow fads rather than pay close attention on the trends and properly manage their money which only causes them to lose their money.
Traders who don’t use stop-losses properly are more vulnerable to losing money. If you also hold unnecessarily large trading positions for too long, you are also at a risk of losing money when in trading. Novice traders who use their stop-losses improperly lack the ability to plan any long-term strategies with them.
3 Risk Managements Strategies to Make You’re a Better Trader
Pay attention to the stop-losses
Traders who lose money have a tendency of entering a trade with only calculated profits without calculating the protective stop-loss as well. Before making a trade, we recommend determining a realistic risk-to-reward ratio. This will help you limit drawdowns, select essential stop-losses, while you also target limits for trades.
Stop-losses are designed to limit losses. A stop-loss will set an order (a defined number of pips) away from the entry point or set a certain percentage below the purchase price hence limiting the total amount you could lose.
One of the common stop-losses used in forex trading is sell-stop which triggers a sale of your held assets whenever the value of the assets moves or hits below the set price. It helps you control your risk in forex trading because if a price seems to be moving contrary to your expectations, it will bail you out.
You can also use the limit order stop-loss which is a type of trade that only allows you to enter or exit a position at the predetermined price. It is a great tool when setting your profit goal and a great risk-control strategy. Limit order can also help you maximize profit when you find yourself in a situation where you notice that the currency pairs will fail to break below or above existing support or resistance lines.
When Deciding When to Sell, Lean on Indicators
A stop-loss is your best friend when you want to mitigate risk in any potential trade. However, the indicators help you identify shifts in the market condition. Hence, trading indicators can help you exit a position before it reaches a stop-loss, allowing you to preserve your capital.
For instance, price changes or moving-average crosses can provide you with instant insight into a shift that could increase your relative risk. This will help you make a decision to pullout before losses increases.
OBV (On-balance volume) is also a great indicator that helps you track the buying pressure you need to sustain uptrends you are trading on. It indicates a turnaround when volumes change dramatically, or when a prove movement goes against what you were expecting. More indicators like technical oscillators like Bollinger bands, moving average, Fibonacci, MACD, among others also come in handy when trading.
For instance, when you use MACD to trade, it can provide you with a bearish or bullish signal when the MACD line crosses over the signal line to correspond to the shift in price movement.
Expect losing trades
In forex trading, investing is more of a marathon than basic sprint. Sometimes, losing streaks are unavoidable and it is best to accept that losing trades happen so you can prepare yourself financially and mentally.
If you place hundreds of trades over the years, a losing steak of 10, 20, or more can happening in a row is feasible. As with most forex traders, unrealistic expectations, discouragement, and other factors leave you vulnerable especially to impulsive trades. To be mentally prepared for the risks you could encounter during trading sessions will help you accept that losses are part and parcel of forex trading.
Forex trading has its advantages and disadvantages and it is best to be prepared for either outcomes. Like with any form of trading, a wise trader is prepared for any outcome. Use the tools provided for you to make more informed decisions when trend. Use indicators in trading trends to minimize your losses. Risk management in forex trading is what keeps you in forex trading.