Since all transactions in the foreign exchange market are subject to a certain degree of risk, traders use special methods to manage them to reduce possible losses and increase profits. There are several methods of risk management:
First, a preliminary analysis must be done. To open a position, you need to have an objective reason. By understanding what is happening in Forex, a trader will increase his chances of earning income. The preliminary analysis consists of analyzing the news released for the last day, determining the High and Low of the day, and identifying the current trend over a long time frame.
Creating a trading plan
The second method is to create a trading plan and follow it.
Each trader has his own trading strategy. Some use fundamental analysis of the Forex market, while some use only technical analysis, some rely only on intuition. The only difference is in the profitability of this strategy for the individual trader. You can create a strategy from scratch, or you can use a ready-made one and adjust it for yourself. Using a certain algorithm and adhering to its rules, a trader will analyze his mistakes and not repeat them in the future. It will also allow you not to be exposed to emotions when trading. Any strategy should be profitable over the long term. Before a trader gets a good and stable result when using a trading strategy, you should not start trading on a real account.
To manage capital, it is not recommended to use more than 5-15% of the total account deposit in one transaction.
How to manage risk in Forex
Another risk management method is to set a loss percentage.
It would be more reasonable to use those methods that consist of "rationing" losses for a trading period. Next, you need to diversify transactions. To manage capital, it is not recommended to use more than 5-15% of the total account deposit in one transaction. Do not forget that many currency pairs are correlated with each other.
For trading on the Forex market, it is advisable to deposit only the amount in the trader's free use.
The next method is to use stop-loss orders. When opening a trade, you must immediately set a stop loss. This method is usually not used when using a scalping trading strategy. However, trading without a stop loss is hazardous.
It is also essential to admit your mistakes. When making them, it is necessary to fix the loss and analyze the situation. It is not recommended to try to "sit out" the loss. If the loss increases and the price moves in the opposite direction from you, it is better to close the deal.
... you shouldn't start trading if in doubt.
Next, we should consider such a method of risk management as control over emotions. Gambling and greed are not allowed in the foreign exchange market. Mindfulness and sober calculation should be applied here. This is the only way to relate to the ongoing changes in the market adequately. If you feel a lot of stress, take a break from trading. The psychological factor is a significant point for a trader.
Also, don't start trading if you are in doubt. In this case, it is better to stay out of the market than to lose money. Do not enter a trade if you think you may have misunderstood the signal. Specificity and clarity are crucial in trading. Only in this case can you make a profit in the Forex market.
These elementary but effective risk management techniques will help you reduce losses and increase your income, as well as respond quickly to changes in market prices.