Risk Management within Forex Trading

Should you choose forex trading as a way to try to further your money, then you need to be aware that it isn’t a risk free field. You can just as easily lose a fortune as you could make one, and it call happen in a blink of an eye as well. It isn’t just novice traders who have to face the high stakes either, as even some of the most experienced names in the field have been stung by their own mistakes. The easiest way to reduce the amount of risk you face is to implement risk management solutions. But, what exactly are risk management solutions within forex trading?

Stops

Stops come in a whole host of forms and are feature within many traders’ risk management repertoires. When implemented properly they provide a base level of protection that can be the basis of your entire risk management strategy. A stop order allows you to put a precursor down, so that if your chosen currency pair drops below a level you determine, it will be sold automatically. On paper stops sound very simple, and in many ways they are, but they need to be used with care. If you place one without careful thought and analysis then you could be putting your forex trading strategy at risk of unravelling.

Diversification

It seems obvious, but you would be surprised at the amount of traders who don’t remain diversified. Diversification should be considered key to protecting your profits, as diversification is much more than just a useful method of risk management. When it comes to forex trading it can be easy for someone to become fixated on a single currency pair, steering clear of this will allow you to unlock further profit potential. After finding a pair you like, try buying it and moving on to another quickly. Keep things fresh and odds are you will see your level of risk reduced. Diversification is also a useful tactic for hedging a portfolio as well.

Position Size

Forex is and never will be an all or nothing route of investment. Before you can even adopt any of the above risk management techniques, you need to take a long hard look at your capital and ask yourself if it is enough. The rule of thumb should be that you never place more than 20% of your funds on a single trade, as to never take up an unnecessarily large position size. Obviously the size you do take up will be largely decided by your attitude towards risk, but never put yourself in a position where you are risking everything on a single trade when forex trading.

Trade Smart

The biggest risk management tool you can implement isn’t even a tool. If you want to reduce the risk involved in forex trading then you should simply trade smarter. Successful traders make sure that they are never left in a precarious position to begin with. They do this by implementing all of the above and steering clear of the many all or nothing investments that are presented to them. Simply put, risk management will always start with your approach to the forex market.

Spreadbetting, CFD trading and Forex are leveraged. This means they can result in losses exceeding your original deposit. Ensure you understand the risks, seek independent financial advice if necessary. The value of shares and the income from them may go down as well as up. Nothing on this website constitutes a solicitation or recommendation to enter into any security or investment.

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