5 Powerful Risk Management Tips for Forex Traders
Tip 1) Have a solid Money Management strategy
Tip 2) Trade with money that you can afford to lose
Tip 3) Don’t Over-Leverage
Tip 4) Set suitable Order Types
Tip 5) Have a balanced trading portfolio
It is commonly known that risk management is the pinnacle of Forex trading. Every successful Forex trader has a consistent, concise risk management strategy programmed into their overall Forex trading strategy.
Successful Forex traders have no control over how the market moves. However, they are able to meticulously control what their risk management strategy is on every trade, therefore inheriting more control over every trade then most other Forex traders… The market could move massively negative to their opened position, but they will ensure that such a negative move will not blow their account. Successful traders are able to successfully decrease their losses on losing trades and increase their profits on winning trades via a comprehensive risk management strategy.
No matter how good of a trader you are, you are guaranteed to lose some trades – that is unfortunately a fact. No one knows how the market is really going to move – otherwise we’d all be millionaires. It’s for this uncertainty that the need to have a proper risk management strategy comes into focus. In this article we are going to go over 5 of the most powerful risk management strategies that successful traders have been using in Forex trading in 2019.
Tip 1: Have a solid Money Management strategy
It is imperative that you have a solid money management strategy in place, in order to limit the risk on every trade that you open.
There are two main money management strategies that are commonly utilised by traders; the fixed percentage method and the fixed money method.
The ‘fixed percentage method‘ is a money management strategy in which a trader will risk the same percentage on every trade that they make. This means that no matter how large the volume of the trade that you are making, the percentage risked does not change. For example, if you plan on opening a position with a monetary volume of £10000 and want to risk 5%, then if the trade went negatively, you would limit your maximum lose to £500 – permitted that you have your stop-loss order at the correct level.
The ‘fixed money method‘ is a money management strategy in which a trader risks the same monetary risk on every trade. So, no matter how large the volume of the trade that you are making, you will risk the same value every time. For example, you may plan to open a trade with a monetary volume of £1000 and £5000 respectively, with both trades having a maximum loss limited at £250 – permitted that you have your stop-loss orders at the correct level.
|Fixed Percentage Method||Fixed Money Method|
|Pros||Helps to limit a traders overall loss when on a losing streak.||If a trader is on a winning streak, their maximum profit will not be hindered.|
|Cons||It can be detrimental to a traders potential profit when on a winning streak after a losing streak.||If a trader is on a losing streak, they will have a higher risk of blowing their account.|
If you’re interested in learning more about money management, we cover it in detail in step 9 of our free Forex course.
Tip 2: Trade with money that you can afford to lose
This is a fairly obvious strategy, and should be considered in all walks of life – but nevertheless, there are traders who don’t seem to follow this rule. You should never risk money that you can’t afford to lose. Unfortunately, you will not always make money when trading, you will incur losses – that is a part of trading.
“The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance.” – Ed Seykota
We don’t want to scare you off of trading. As you will have as many profitable days as losing days, its making sure that you are able to survive the losing days to be able to bounce back on the winning days.
Put it like this: if your overall trading strategy is profitable 65% of the time, then you should be profitable overall with a consistent risk management strategy in place. You may lose the first 35% of trades in a row, and you want to be able to survive through this to make sure that you can profit on the remaining 65% of trades that you still have to make!
Tip 3: Don’t Over-Leverage
Leverage is one of the most lucrative things in the Forex trading industry, it allows you as a trading to leverage your position 100 fold! Now, if used correctly leverage is a really important tool that can really help boost your profits. However, as well as amplifying profits, leverage can amplify losses. You need to find a leverage that works well with your strategy, but doesn’t blow your account when the slightest bit of movement in a negative direction.
We would recommend that a using a maximum leverage of 30:1 is more than enough. Most professional traders don’t use a leverage greater than 20:1! We understand that using a 200:1 leverage can be great when you profit, but trust us that you will not like it as much when you lose.
“The greater the amount of leverage on the capital you apply, the higher the risk that you will assume.” – Investopedia
Tip 4: Set suitable Order Types
As part of your overall risk management strategy, you need to set predetermined order types, mainly being stop-loss orders and take-profit orders.
A stop-loss order is necessary in order to protect the remaining equity in your account in case the opened position moves negatively. Who knows? The market could all of a sudden crash and you could blow all your account. It is always better to be safe then sorry in trading.
A tip is that you do not change the level of your orders whilst the trade is active. You should not play on emotion when trading and stick to your original trading plan.
For example, the trade goes positive by 20 PIPs and you cash out early, but eventually that same trade reached your take-profit order at a profit of 100 PIPs. After reaching this 100 PIP limit the price then drops by 300 PIPs – also showing the importance of setting a take-profit limit.
Find out more about popular order types in step 3 of our free Forex course.
Tip 5: Have a balanced trading portfolio
You should not concentrate on one currency pair, you should set out to have a balanced widespread portfolio consisting of currency pairs that are not closely linked with one another.
As you should know, that when one currency pair moves it has a knock on effect to closely linked currency pairs, such as all the major currency pairs. Therefore, if you traded on your bias on all of these currency pairs, the fall in one could have a knock on effect and mean that you make a loss on all of your opened positions.
This particular strategy enables you to limit your overall risk and can potentially enable you to make an increase in profits.
Risk management is an important part of trading, and should be taken as seriously as choosing what positions to open. We hope that these 5 strategies help you with your risk management plan, or at least can get you thinking about what risk management is and the sort of things that you need to consider in order to make a concise risk management plan that works best for your trading strategy. Make sure that you are consistent in following your plan, whatever you do decide to include!
What to do next?
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