In online forex trading, risk management helps traders reduce losses and protects their accounts from losing money. Risk happens when there are losses, but if the said risk is properly managed, traders open themselves up to making more money.
Risk is an important factor in forex trading, but sometimes, it can be overlooked by some lax, overconfident traders, which results in serious losses. Here then are some practical trading habits you can apply to minimise risk exposure.
- Treat your trades like a battle and plan accordingly.
Battles are won with careful planning and strategy. You can achieve the same victorious results if you apply the same elements to your trading activities. Oftentimes, the simple action of just planning ahead can be just what you need to ensure a successful trade. The first thing you need to do is to partner with the right kind of broker. You need to find one that’s in line with your needs and lifestyle as a trader.
Second, you need to determine your stop-loss and take-profit points—the former refers to the price you are willing to pay and the latter to the price you are willing to sell. You need to know these factors ahead of time so you can measure the probability of your stock hitting its expected goals.
- Keep the one-percent rule in mind.
The one-percent rule states that a trader should never put more than one percent of his capital into just one trade. Therefore, if you have about $1 million in your trading account, you shouldn’t put in more than $100,000 into any trade.
Many traders practice this rule, although with traders who hold accounts of less than $100,000, they prefer to go as high up as 2 percent. However, traders who have bigger balances often decide on a lower percentage as a way of keeping their losses in check. This is because the bigger the size of the account, the higher the position and the greater the possible losses.
- Never put all your money into one stock or instrument.
Maximizing your trade also means never putting all your funds into just one account, one stock, or one instrument. If you do so, you’re only setting yourself up for a big loss. What you can do instead is to diversify your funds into several instruments or accounts. Not only does this strategy help you to minimise risk, but you also open yourself up to more trading opportunities.
There may also come a point in time when you would need to hedge positions; you can take the opposite position of your stock when results are due and when the activity dies down, you can then release the hedge. Moreover, if you are into options trading, you can buy a put option in order to prevent or reduce losses from potentially bad trades.
As a trader, you should always know the exact timing at which you join or leave a trade before you execute it. This helps you to know when to apply the above-mentioned risk management strategies at just the right time, thus ensuring your success in the market.
Clyde is a highly creative and dedicated person with an entrepreneurial spirit. He is always looking for ways to help people, whether it be contributing to their success or just making them laugh. His commitment is demonstrated through the dedication he has put into all of his work so far, which includes writing business blogs for various companies as well as running his own blog on Medium. He loves reading books about how other people became successful entrepreneurs like himself; he finds inspiration from these stories and hopes to make a positive impact on others’ lives too!