10 Ways to Minimize Risk When Trading Forex

ForexNewsNow | Published on September 21, 2011 at 9:55 am

ForexNewsNow – Trading forex is risky. But there are ways to limit risk when you’re “pipping” so that you can ride the trends’ ups and downs while minimizing the danger of getting thrashed like a surfer trying to catch “the big one.”

Here are 10 ways to limit your risk of loss when trading foreign currencies with an online forex broker:

  1. Trade during periods of high liquidity. You want to get your trades in as soon as the markets, indicators or signals tell you to; and that means you want a lot of potential liquidity providers ready and waiting to fill your order. Because of this, it’s important to trade during “peak” trading hours, which vary depending on what you’re trading and where you’re located. Be sure to research his information before you get started.
  2. Trade with a regulated foreign exchange broker. Foreign exchange brokers that are regulated by a reputable financial authority must abide by a series of criteria when they are filling their clients’ buy and sell orders and this means they are less likely overall to engage in unethical practices. Some forex brokers – market makers – may in some cases take the opposite end of a trade you initiate meaning your gain is their loss and vice versa. This, of course, may lead to a conflict of interest which could lead the broker to be less likely to fill your orders when you’re riding a breakout in the right direction, for example. In that case, it’s all the more important to have an impartial authority looking over the broker’s shoulder in order to make sure they are playing by the rules.
  3. Place a stop-loss order whenever you execute a trade. Without thinking twice about it, enter in a stop loss order whenever you execute any type of forex trade. Use a trailing stop if you prefer, but insert one of them no matter what. Even when you think there is no way the pair you’re trading will turn the other way or you’re sure you will be able to manually close out a losing trade, it’s always safer to have a stop-loss in place just in case Murphy’s Law kicks in. You can leave yourself room to breathe by leaving your stop loss order significantly below or above (depending on if it’s a buy or sell order) your open price, but it’s important to have a safety mechanism present to close your trade should all hell break loose – ie. another Bank of Japan intervention when you’re short on USD/JPY.
  4. Trade with a plan. Trading forex is like any other type of financial investing, you need to research your asset, predict how it is likely to respond in the current economic climate and craft a strategy to seize upon its predicted pricing patterns. You should know when you want to enter a trade, when to exit a trade, how much you’re willing to risk, how much profit you hope to gain, etc. Without a forex trading plan, you might as well save yourself the time, money and frustration, go to Expedia and pick yourself up a cheap flight to Vegas to spin the roulette wheel a few times.
  5. Don’t be greedy. Decide how much profit you hope to achieve before you execute each trade and, once the profit level is achieved, close your trade and take your profits. If you start waiting around to get 120% of your profit expectation instead of 100% each time, you’re likely to end up with a negative ROI in general. On the other hand, it’s also important not to get consumed by fear and close your trade as soon as you’re a few pips in the profit zone. You will most likely have a few losing trades any time you trade forex, so it’s important that you make the winning ones count by letting them run their full course.
  6. Trade what you know. If you have never seen a pricing chart for EUR/CHF and you’re not sure what the acronym SNB stands for, don’t trade it. (By the way, I was referring to the Swiss National Bank…). Stick with what you do know. If you know the GBP/USD 1-hour chart like the back of your hand and you’ve scrutinized ever piece of news that has come out about the Bank of England for the past few weeks, trade the pound instead. Successful forex trading requires in-depth fundamental and technical analysis for each asset and it may be imprudent to jump the gun and invest before you’ve had a chance to go over the requisite course material.
  7. Start with a free demo account. If you’re new to the fast-paced world of forex, start with a free forex trading demo account, which almost all online forex brokers offer to new traders. Trading with a free demo enables newbies to hone their skills, learn the popular forex indicators and how they’re used to identify potential breakouts and reversals and – most importantly – do it without the risk of finishing with a hole in your bank account.
  8. Stay focused after absorbing losses. If you’ve lost money on a forex trade, don’t let it get to you. Learning to accept losses and keep a clear, focused mind is a significant part of the challenge of earning money by trading forex online. Often times, forex traders may react stubbornly to a losing trade and continue to trade in a direction that has already lost them money in the hopes that they will regain their losses by trading in the same direction despite the fact that the trend shows no sign of changing. This is not what will usually bring one’s daily P/L back into the positive. Instead, try to tell yourself that losses are an integral part of financial trading and keep yourself focused on your trading plan.
  9. Be familiar with the indicators. It’s important to have a working knowledge of the major forex indicators such as Fibonacci retracements, the Relative Strength Index (RSI), the Moving Average Convergence Divergence (MACD) and others. Knowing what they show about a currency pair’s pricing patterns can help give an insight into what trades you should make and, perhaps more importantly, what trades you shouldn’t make.
  10. Quit while you’re ahead (ie Don’t overtrade your account). Once you’ve realized profits from forex trading according to a plan you’ve crafted for yourself, retire for the day (or longer) and enjoy the fruits of your labor. One of the biggest mistakes forex traders can make is overtrading their account. This often leads to losing focus, executing trades that are not within the rubric of one’s trading plan and committing unforced errors when setting stop loss/limit profit orders.

These ten guidelines can help you trade forex profitably and responsibly by establishing some key principles that can help keep you focused when the forex markets seem to have gotten the best of you.

 

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