Forex trading is an investment that contains speculation, thus it is very important for a forex trader to know various tips for managing risk. In this article, we will talk more 5 tips to manage risk forex trading.
In investing, the potential return on an investment is always directly proportional to the risk. An alternative investment that is aggressive (has a high return) at the same time contains a relatively high risk, and vice versa. Based from thebalance, here are 5 tips for managing risk in forex trading:
1. Determine Trading Risk Tolerance
Most of the trading instructors will put out figures such as 1%, 2%, or up to 5% of the total value of your account at risk on every trade placed. However, how comfortable you are with these numbers is based largely on your level of experience.
For example, if you have a trading method that places an average of one trade per day and you stake 10% of your initial monthly balance on each trade, it would theoretically only take 10 direct trade losses to completely exhaust your account.
2. Customize Contracts
The easiest way to ensure you get as close to the amount of money you want to risk on each trade is to adjust your position size. The standard lot in currency trading is 100,000 units of currency, which represents $ 10 / pip in EUR / USD if you have US dollars (USD) as your base currency; one mini lot is 10,000.
3. Determine the Time
There may be nothing more frustrating to trade than skipping a potentially successful trade simply because you were not available when the opportunity arose. Because Forex being the market 24 hours a day, that problem arises quite often, especially if you trade smaller time frame charts.
The most logical solution to that problem is to create or buy an automated trading robot, using a 4 Hour, 8 Hour or daily chart.
4. Avoid Weekend Gaps
As we know, the forex market is closed on Friday afternoons. As a result at the end of the week the charts around the world froze as if the price had been fixed.
However, that frozen position was a misnomer and was not real. Prices are still moving here and there based on the events of the weekend, and can move drastically from where they were on Friday to when they are seen again after the weekend.
5. Watch the news
News shows can be very dangerous for traders who want to manage their risk too. Certain news events such as employment, central bank decisions, or inflation reports can create abnormally large movements in the market. It can create gaps such as weekend gaps, but much more sudden.
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