Forex trading risk management should be the no. 1 thing you think about as a forex trader.
It should be the first thing you think about in the morning and the last thing you think about before bed. You should live and breathe risk management.
While there are hundreds of different ways you can improve your forex trading risk management strategy, here we’ll focus on the best tips to make your strategy the best.
In this article, we’ll uncover our top 10 forex trading risk management tips! Some of these are top secret, not even some pros know about them!
81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
What is risk management in forex trading?
My dear child, if you are still asking what risk management is in forex trading, you still have a lot to learn! But don’t worry, we’re going to sort that right out!
In forex trading, risk management is super important. It’s all about preventing losses. After all, we’re not here to gamble away all our money, are we?
We’re here because we want to make money, and if we lose all that precious money, we can’t make more, can we?
In forex trading, avoiding risk and making a profit are intricately intertwined.
You may need to change your perspective. Forex trading is not about getting that one trade that makes you a gazillionaire, it’s about accumulating money over a long period of time.
That is real forex trading success.
You can use risk management in all types of trading, not just forex. All forms of trading (stocks and crypto included) should take into account risk management.
Top 10 Forex Trading Risk Management Tips!
If you can stick to these top 10 forex trading risk management tips, you’ll survive the forex trading arena and stand a much better chance at making your forex fortune.
1. Understand The Risks of Forex Trading
This tip isn’t optional. It’s a downright must. If you don’t understand why forex trading is risky, you need to back up to the top of this article and read it all over again!
There is a universal truth you have to accept when it comes to forex trading or any trading for that matter; no money = no trades = no fortune.
Basically, you need to have money to trade forex, without it your nothing but a market spectator. And so, you need to protect what you already have first.
You need to get in the habit of assessing your risk first, then making forex trades. Not the other way round!
Scary fact, up to 90% of forex traders lose money. How insane is that? If that doesn’t tell you how risky forex trading is, nothing will.
And here’s another fact, most forex traders would consider a success rate of 50% successful. Which gives you a sense of how much even the most successful traders lose - half the time!
Now those two facts have been made clear to you, do you now understand the need to put risk management before forex trading?
2. Always Use Stop-Losses and Take Profit orders
Super basic stuff, but even the best of us can forget this tip.
But for those that don’t know, a stop-loss is a feature available on most broker platforms that allows forex traders to set a certain price to exit a trade.
You place a stop-loss lower than when you opened your position. This reduces your losses if the price goes lower.
Without a stop-loss, you can make some big losses, especially if you’re not paying attention.
A take profit order is the opposite of a stop-loss. You place it where you want to exit the market. In other words, the point at which you will make a profit and be happy.
Before making a trade, know where you want to put your stop-loss and take profit order.
Forgetting to use a stop-loss is one of the biggest mistakes you can make as a forex trader! Ideally, you should place it about 10-15 pips below where you entered.
By giving the stop-loss a bit of a buffer, you can prevent getting stopped out. This can happen when the price first goes down and then shoots back up again.
81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
3. Look For Points of Confluence to Reduce Risk
What is ‘confluence’ you ask? Easy question. Confluence can be defined as where two points meet. It is where two different things are saying the same thing.
In forex trading, you can see points of confluence when two indicators are telling you to buy or sell.
When it comes to indicators, you cannot wholeheartedly follow them. They can get things wrong and you can make the wrong trade because of them.
That’s why it’s smart to use indicators two in conjunction with each other, and then only trade when both of your indicators are in agreement with each other.
By doing this, you can dramatically reduce the risk of falling for false signals from your indicators.
4. Be Consistent When Following your Forex Trading Plan
Learning any skill requires you to practice over and over again. Think of it like a muscle that needs to be exercised. When you don’t use that muscle, it gets weaker.
When you have a trading plan, you need to stick to it. You can’t just disregard it every time you get a ‘feeling’ otherwise, just like a trained muscle, it gets less effective.
Your trading plan should, of course, be realistic. Aiming for the heavens isn’t really advised. You should aim at what you are capable of achieving.
By being consistent with your trading plan, over time, those earning will build up. Sadly, forex trading isn’t supposed to be fun, it’s supposed to be boring.
Exciting things rarely make you the money you want, boring things do.
But most importantly, by being consistent you’ll skip those risky moments when you really shouldn’t be trading.
Remember this: Inconsistent traders never succeed!
5. Know How Much to Trade (and when not to trade!)
One of the coolest rules you can follow is the 1% rule. It is probably the king of forex trading risk management tips. It is seriously useful!
And what makes this rule so great is that is very simple to follow. It goes like this; only ever trade 1% of your trading account on any trade - no more, no less.
And how does this help?
If you break your trading account down into this way, your trading account will last a lot longer. For example, some novices with a trading account of $3,000, might start making trades with $1,000.
That is completely insane! If you lose that you’ve lost a third of what you have to trade with! All you need is three losing trades and you’ve lost your savings.
Well done, that’s just terrible! Leave the $1,000 trades to the big boys.
With the 1% rule, with $3,000, you should only be trading $30 per trade. This way you will last a lot longer, will have more opportunities to make a profit and will learn a lot more on the way too.
81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
6. Be Careful with Leverage
Leverage is very alluring. It offers forex traders the ability to trade way beyond what they actually have.
And while most of the time we at Trading Education say to be careful of leverage, it can be useful sometimes, if you know what you are doing.
But to be brutally honest, for many traders, it really isn’t worth using leverage at all. This is particularly true with beginner forex traders who can end up emptying their trading accounts very quickly.
Leverage, in most cases, is not a good friend. It’s like that friend that encourages you to stay up late and get into trouble. In the end, you’ll likely regret it.
Even traders of medium level skill to professional avoid - or are at least very cautious - of the risks involved in using leverage.
7. Diversify Your Risk
When you start out as a forex trader, you will most likely start out trading one specific currency pair, probably one you feel you know well.
Maybe you’re from the UK and feel comfortable trading the pound, and considering the USD is the most traded currency, you probably would start out trading the GBP/USD.
Now, while there isn’t necessarily anything wrong with that, you will not always be able to trade your favourite currency pair successfully.
There will be times when it just isn’t smart to trade that pair. It could either be too volatile or too stagnant, both of which can make it too risky to trade.
In such situations, you need a backup currency pair to trade (or, ideally, backups). A pair that isn’t so risky and presents better opportunities to profit from.
By trading multiple currency pairs, you can diversify and spread your risk and reduce it significantly.
8. Take Your Emotions Out of The Forex Trading Game
This is a tip that challenges most forex traders. Taking control of your emotions is a very difficult thing to do.
You need to be like a samurai. Emotionless, but ready and waiting to pounce at any moment when the right trade comes along.
In anything related to business or money, emotions are dangerous. They make us do stupid things that we regret.
It can happen if we’re angry, sad, or even too happy. There is a risk associated with each of them.
When we’re angry we can be too aggressive and jump in and out of a trade too fast.
When we’re sad we might no longer care about the result of the trade.
And when we’re happy we can risk too much on a stupid trade.
Our top tip here is to learn how to spot your emotions. When you start feeling a certain way, stop trading until it passes and come back later with a clear mindset.
81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
9. Understand How The Market Moves
Not everything in our world is pure chaos. Beneath all the madness there is a vague order to life and for us forex traders a rough order the markets follow.
When you look at the markets very closely (for example, one-minute charts), it might not look very ordered. But when you zoom out to days, months or years, you will see that there is a pattern.
Markets go through highs and lows, specifically periods where the market is going up, going down or staying up or staying down.
To avoid risk in forex trading, you need to be able to spot when these moments are coming.
You don’t want to be making huge trades when it’s likely the market is about to sink to a new low or start to stagnate.
10. Learn From Your Mistakes
Our final forex trading risk management tip is to learn from what you got wrong.
Not many forex traders start out knowing it all. Every single successful trader out there today started out as a novice and made losses along the way.
They had to make many mistakes to get where they are today. Each mistake made them stronger so that the next time they find themselves in the same situation, they can dodge it and prevent the same outcome.
If you understand what you got wrong last time, you understand the risk involved if you get it wrong again.
Sometimes the best way to learn is by doing. If you don’t actively try to learn from your mistakes and take steps to prevent them from happening again, you are doomed to repeat them.
A great way to learn from your mistakes (as well as your successes) is to keep a trading journal. With a trading journal, you can write down all your trades and assess what exactly went wrong.
81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
Key points
If you remember anything about the Top 10 Forex Trading Risk Management Tips: How To Stay Safe, make it these key points.
- There are tonnes of things you can do to reduce risk when trading forex. The more you practice these tips, the better you’ll be at mitigating risk and making a profit
- You should know why forex trading is risky. Risk is always present in forex trading, and you must be able to recognise all the different ways it presents itself.
- Don’t forget the basics. Things like putting a stop-loss are really, really easy and can save you a lot of risk.
- Mistakes are only bad if you don’t learn from them. All mistakes are a chance to learn more about forex trading.
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81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
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Rememer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.