We cannot write enough about the significance of risk management. A lot of beginner traders quit Forex trading right after facing first losses. It happens mainly because they tend to invest all their money at once without having a backup plan, and, most importantly, without any risk management. However, risk management is what helps you foresee potential losses, prepare for them and keep trading. Moreover, the knowledge of risk management as a beginner will help you not to feel discouraged and take advantage of everything that the Forex market has to offer.
Let’s see the main points of risk management that you should follow to make sure that you secured your trading capital.
1. Plan ahead
It is vital to plan your deals before opening them. Yes, sometimes the market calls for immediate action, but most of the time it’s important you sit down and plan your future investments.
It might be useful to write down all the information you have about it for now - the suggested opening price, at which price you are going to close it, your investment amount, leverage, etc. A trading journal could be of great help.
2. Set your Stop Loss and Take Profit
One of the essential risk management rules people tend to overlook is setting the limits to your trading. It’s always nice to think that the market will always go in your direction, but the thing is no one can predict it - that’s why it’s called ‘risk management’. Sudden price changes influenced by the news are more common than you think, and unless you monitor your deals 24/7, you need to use pending orders, such as Stop Loss, for example.
3. Calculate the expected profit
You must know how much you can get in case your deal is successful. This calculation will help you with planning your future investments. Therefore you will be even more prepared for the next deals. That said, you should never forget to calculate your potential losses.
4. Diversify your portfolio
It’s never a good idea to have only one asset in your trading portfolio, even if you have been studying it for a very long time. Investment in only one asset can cause you quite a big loss in case the price takes an unexpected turn.
Make sure you diversify your portfolio by investing in several assets., Tthus lowering the risk of losing your money and, opening up to new trading opportunities.
Hedging is a trading strategy, but also another simple and effective risk management strategy. The basics are easy - you need to open two deals in opposite directions. This trick allows you to keep your original position and earn even if the trend reverses.
6. Determine the amount you can safely invest
Professional traders prefer following the rule of 1%, which is quite simple and sounds just the way you would expect: don’t invest more than 1% of your overall funds into one deal.
You can vary that percentage depending on your trading needs, but remember that investing more than 15% is already considered high-risk trading.
There are countless ways of risk management you can apply to your trading, but it’s easier to start with the basics and work out what works for you the best. Remember, trading can be risky, but you are always in control of your funds if you apply your strategies wisely.