Beginners and experienced traders alike might be daunted by the prospect of losing more than they can afford to lose at times. Here’s how to deal with the unsettling risks that often discourage people from engaging in trade despite the great potential for profit and stay safe as you trade Forex.
Add Automation with a Stop Loss
The times when traders couldn’t afford to get distracted for a minute without exposing themselves to potential losses are long gone. Today, you can place an order with your broker to automate sales.
A stop loss works as a trigger that initiates the sale of a currency when it reaches a price below which you don’t want to go. Thus it prevents a bad situation from becoming catastrophic. Apart from saving time, the approach eliminates the panic that’s typical under such circumstances and usually far from helpful.
Bring Automation to a New Level with Take Profit
A take profit is another time-saving tool that serves the purpose opposite to that of a stop loss. Rather than mitigating an existing risk of loss, it can be used to make sure you don’t miss an opportunity. You can use a take profit to close a position automatically once a certain profit level is reached. Of course, this requires you to have a clear plan, which is always the wise thing to do.
Use Leverage Sparingly
Leverage is an instrument that offers you access to greater profits than you could expect when using your deposit alone. Attractive as it may sound, it might heighten the risk when abused. Since big leverage enables users to place trades worth more than they can afford, it can cause them to suffer dramatic losses when things go wrong.
As a rule of thumb, it’s best for beginner traders to limit their leverage. A sound approach is only to use one when you’re fully aware of how much you will lose if the market moves against you — consider the worst-case scenario.
Run a Diversified Portfolio
Don’t put all your eggs in the same basket. So goes the time-tested mantra for pretty much any finance-related activity, surely applicable to Forex trading. Probably the most obvious way to spread the risk is not to limit your trade to a single currency pair.
While it’s true that diversity is generally safer than sticking to just one instrument, it’s essential that your portfolio remains manageable. Two to three pairs are generally considered enough to diversify your trade.
Remember the Golden Rule
The approaches above all work great to minimize the risk that you run as a Forex trader. Yet, it’s an established fact that big opportunities come at a high cost when things go wrong, so here’s the classic rule to keep you reasonably safe at all times: never trade more than you can afford to lose. Combined with the above practices, this makes a solid risk control strategy for anyone engaged in Forex trading.