One of the ways that you can succeed in forex trading, is to have a thorough risk management strategy. With the right techniques in place, and effectively managing the risk involved, you can avoid potential losses and help towards maximising your profits.
You can trade forex contracts for difference (CFDs) on a forex trading platform like Skilling, for example, where you have the option to trade with leverage. In addition, with an online trading platform, you can often employ risk management tools as part of your trading strategy.
So, if you’re interested in the forex market, let us explain more about these trading tools and the basics of risk management, to help you to become a successful trader.
Limit Order
One of the many risk management tools you can use on an online trading platform – a Limit Order on your trading position is most likely used in the long-term. It acts an instruction to buy or sell an asset when it reaches a certain limit, such as a particular value in the market.
In some cases, the order can implement depending on the reward-to-risk ratio of the trade. For example, you can set a Limit Order on your position on a currency pair, at a certain number of increments (pips) above the entry price.
This risk management tool is particularly effective for the forex market, as it can beneficial during times of volatility, when the prices can change dramatically in a short period of time. All types of orders placed on an online trading platform remain in place until they are executed according to the levels set by the trader, or are manually cancelled.
Stop Loss Order
This risk management order focuses on your losses. It can close your position on the forex market, when the value of a currency pair drops, and you are making losses of a certain level. It effectively tries to limit the damage and prevent any further losses from a fluctuating market.
For the forex market, this means that you do not have to check your position at all hours of trading — 24 hours a day, five days a week.
The levels you set can be changed at any time, but there is some caution to be had over increasing the amount of loss you’re willing to incur, as this can increase the risk of your trade.
Take Profit Order
Also known as a Close at Profit Order, the clue is in the name for this risk management tool. With a Take Profit Order, you can close your position in the forex market, when a winning trade reaches a specific price and profit level, set by you.
Like with the other orders you can place on your position, it relieves some of the pressure to monitor the forex market at all times, and can be useful when there are high levels of volatility.
It is also a beneficial tool for setting goals about the expectations of the return on your investment, and can mitigate the risk of loss incurring if the market changes in the future.
Techniques for managing risk
There is always going to be the risk of losing money when forex trading. But alongside the trading tools you can use, there are several other techniques you can adapt to minimise your potential losses:
- Do your research
Patience is a key element of forex trading, and you should never rush into things. Take the time to do your research beforehand, as you shouldn’t trade in currencies or try a strategy, you’re unfamiliar with.
- Risk vs reward
As part of your research, you should look at both the risk and reward before you make a trade on the forex market. In theory, the more risk involved, the higher the potential reward. However, if the risk is too high or not suited to your overall trading goals, then it may not be the right trade for you.
- Control your emotions
Your trading decisions should be well-informed and logical, and not influenced by greed, nerves or excitement. These kinds of emotions can negatively influence your trading, when you should instead aim to stick to your trading strategy as much as possible.
