Forex Risk Management

The Forex market is highly lucrative battle ground where traders fight for money and when money is made, money is lost too. However what makes trading currencies different than gambling at a casino is the ability for hardworking individuals who spend their time tracking the news, analyzing and managing their risks in trades to take full control of their investments and have stable large returns. In this article I will give you a few tips to help you manage your risk when trading on the Forex market.

- Stop loss and Take profit orders:

Most Forex brokers offer a stop loss and take profit orders which can be used to manage the Risk reward ratio. Set your stop loss according to how much are you willing to risk on every trade I personally never risk more than 0.85% of my funds in one trade hence my stop loss orders are always set accordingly. Don't set stop loss orders too low otherwise your position might close with the usual small ups and downs in the currency pair price. Always set your take profit orders with reasonable profits or you might end up passing the awaited up / down movement in the position and start making losses. Monitor volatility in the market at all times and make sure to adjust both orders accordingly.

- Trading similar instruments:

Avoid holding positions on currencies that tend to move together in the same direction for example the pairs EUR / USD and GBP / USD tend to move together in the same direction hence I avoid having positions opened on both unless I have a urging fundamental or technical indication to act otherwise.

- Don't chase your losses:

All traders including yours truly have had losses at some point or another but smart traders only chase profit and once have had bad experience with a certain instrument, it remains neutral to him and he moves on chasing profit unlike many traders who take the casino approach and pump more money into a losing trade trying to compensate for their losses. When it is time to move on. Never chase your losses.

- Take control of your leverage:

Not all brokers allow you to adjust your leverage however adjusting leverage is a great way of managing your risk to learn more about leverage you can read my article Leverage - A Gift or a Curse.

- Diversify your portfolio:

Always look for new instruments to trade with the more you diversify your trades the less risks you may have face. Use a broker that offers more instruments like futures, stocks, ETFs, options, bonds, CFDs or mutual funds.

- How to do it right?

Set a risk reward ratio, I personally use 1: 3 ratio so for example on a trade that I set my take profit to $ 3000 I set my stop loss to $ 1000. I personally recommend this ratio as it is a balanced ratio.

Unlike many others Traders who chose to control their risk and rewards are most likely to stand a chance against bad days in the markets by taking control of their trades and make profits on a risky market like Forex.

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Source by M. Wael Alkel