What if we ask you to define risk management in currency trading? It is likely that the first thought that would enter your mind is to reduce the risk of losing money. And certainly that is a primary concern. However, with currency trading assessing risk and managing that risk involves different strategies along the way towards the goal of a realized profit or loss.
Stop loss orders
There probably is no more important risk management tool than a stop loss order. We live in a world of a 24/7 news cycle. At any given point in time news can affect currency trading significantly. Unless you plan to stay awake 24 hours to monitor each trade that you make, a stop loss order can prevent a major loss of your trading capital. Your stop loss is a part of your trading plan, and should be based on calculations that you have made before you may the trade. Look at this another way, trading without a stop loss carries with it the risk of unlimited loss. Essentially you could zero out your account. A stop loss order to ensure you live to trade another day. Go to sleep.
Trading Leverage
With currency trading you will find that size does matter. The size of your position will determine how much risk you are exposed to, the larger the position, the more significant the risk. Forex accounts are often tied to margin accounts and create an opportunity for you to take on higher positions through leveraging. The temptation will be to take a large position. After all you’re in this business to make money. There is a limit on your leveraged position, and trading too large a position in relation to your available margin reduces considerably your cushion against adverse price movements. You would be better off to start with a lower leverage position, or not use one at all until you gain experience.
Trading with a plan
Again here we are with explaining the value of a trading plan. Market swings are inevitable and currency trading, as are your emotional reactions that come with those price swings. Having a trading plan that will dictate when you exit and enter a position will reduce your risk and therefore protect your capital. Investing in any security whether it is stocks, bonds, commodities or currency trading is about protecting and preserving your capital.
Take a breather from the market
Trading currency is an intense exercise of concentration and sometimes stress. Stepping away from the market sometimes brings a clearer perspective. If you are able to watch from the sidelines and you are not invested in the market, you will be able to better focus on your own trades when you do enter the market. In other words, your brain, your strategy, and your body would do well to set a time of recovery periodically.
Take profit
One area that often troubles investors of any security is when to take a profit. Taking profit regularly is valuable not only to your account balance but to your psyche. Success breeds success. Many a dollar has been lost on investors greed. Remember you will never be able to choose the highest price point in your trade. This goes back to your trading plan, where did you decide was the exit point. Don’t get wrapped up into talking yourself into, a little bit more. A little bit more often turns into a whole lot less.
In combination with taking profit you should periodically take money out of your trading account. If you’ve made money in the market, you should take some money off the table. Your trading account is not your bank account. Withdrawal money regularly and invest in other investment vehicles, spend the money in other areas. You have spent a tremendous amount of energy making money in currency trading and at some point you have to enjoy the reward.
Related posts: