Do you enjoy the excitement of trading forex but want to keep risk to a minimum? If so, there’s good news. Traders all over the world use a variety of methods for preserving precious capital whenever they enter into a foreign currency transaction. The beauty of the techniques is that they don’t require special math or IT skills, either.
All you need to is review some of the more common ways that experienced traders keep their risk levels low and choose a few strategies for yourself. Remember, a lot depends on your personality, your budget, and other factors unique to your own situation as you place orders day in and day out. Here are some of the most popular ways for maintaining your account balance and being able to survive multiple losses in a row.
Even if your broker offers you a large amount of leverage, don’t use it too often. Save your allowed leverage for special situations in which you feel that a prospective trade has a very high probability of delivering positive results. Write a rule about leverage into your own trading rules, stating the specific circumstances under which you will resort to employing leverage.
Use Stop Losses on Every Trade
If you want to learn more on what is forex stop losses, and how they work, there are plenty of excellent resources online. Another good place to look is in your broker’s educational section. In any case, you should strongly consider using stop losses every time you place a trade. Stop losses are an easy, safe way to prevent a small loss from becoming a large one. Experienced stock and forex traders typically don’t take a position in the market without setting a firm stop loss.
Have Upside and Downside Exit Plans
It’s one thing to have a point at which you’re willing to get out of a position. However, it also makes sense to know how much profit you want to take. Remember, once prices begin to rise, they often fall again very quickly. So, setting a gain-loss point makes sense for most people. Knowing the exact points at which you’ll get out of a position, both on the upside and downside, is part of a comprehensive strategy.
There are two common ways to diversify a forex portfolio. One is called general diversification. It involves using instruments other than foreign exchange pairs as part of your overall activity. For instance, you might decide to hold a generally diversified portfolio that includes 20 percent stocks, 20 percent precious metals, 20 percent options, and 40 percent foreign currency pairs. Specific diversification refers to only trading forex but making sure to buy and sell several different pairs. Of course, many people prefer to specialize in just one pair, but if you decide to opt for specific diversification, you’ll need to expand beyond your one or two favorites.
Follow Your Own Rules
Once you make a list of rules of engagement, follow them to the letter for a set amount of time before changing anything. What you want to avoid is going into trades with a different set of guidelines each time. That’s a fast way to major losses. A rule set should contain your criteria for getting into a position, deciding what size stop loss to set, what limit to set on the potential gain, and how much capital you’ll put into a given trade.
Use Wise Money Management
Money management can often help you preserve your account balance even when you endure a long series of losses. A common technique is to never risk more than two percent of your available account balance at a time. If you have $15,000 in your account and decide to enter into a forex transaction, the two-percent rule would limit your buying power to $300 (two percent of $15,000).
Know Your Personal Risk Tolerance
If you understand your own tolerance for risk, you’ll be better equipped to take on all types of market conditions without losing your cool. Interview yourself and try to honestly assess how much uncertainty you can handle. On a scale of 1 to 100, give yourself a risk-grade based on your age, budget, amount of experience you have with forex, your knowledge of the markets, and your profit goals. Once you mull over those factors for a while, decide whether you’re a risk-avoiding personality or not. This one key piece of self-knowledge can help you hold back when you feel the urge to put too much capital on the line or take a position that is too risky for your taste.