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How to Lower Your Risks in Forex Trading

How to Lower Your Risks in Forex Trading - 1000Pip Builder

Forex trading is a highly risky enterprise. It holds as many money-making opportunities as money-losing ones. However, if you can manage the risks, the potential return of the business is limitless.

Here are ways by which you can minimise your risk without having to shortchange yourself.

  • Define your trading goals

    And it must be emphatically stated that there is an element of truth to it. Perhaps, there is nowhere else this truth is even more useful than in the Forex market.

    As a Forex trader, your first challenge should not be how and when to make your first trade. Instead, it should be how to achieve clarity about your trading. Why do you want to trade? Is it because many others are doing it, and you see it as a cheap, easy way to make quick bucks?

    What precisely do you want to achieve in your trading? What trading strategy would you adopt that would position you best to be able to achieve your goals? Your first challenge is the defining of your trading goals. Therefore, endeavour to do it well.
  • How realistic are your trading goals?

    Having defined your goals, you should ask yourself next how realistic they are. Many traders get thrashed not because they are not skilled but because they set their bars too high. It is a balance, though, as goals set too low can make you underperform and hinder your progress.

    However, you should ensure that your goals for trading are realistic. Doing so will help you to take moderate risks while achieving substantial returns. Setting unrealistic goals, especially at the amateurish stage of their trading career, is one of the habitual ways by which traders set themselves up for failure.

    As a trader, your returns will not be constant. Some months, you will make a lot. Others, you will make far less. However, having an expected return in the form of a defined, realistic return on investment (ROI) will not only help you stay on track but also monitor your progress.
  • Eliminate your brokerage risks

    Eliminate your brokerage risks. Many traders fail before they even start. And this is because they make terrible choices of brokers. Your broker, to a very large extent, can determine your accurate Forex signals destiny. If you pick a bad one, you could be doomed.

    Therefore, before you choose a broker, do your research. Is it regulated? What is the regulatory authority it is registered with? How standard is it? What are its offerings and terms of operations? What are its users saying about its services?

    All these can give you hints about its quality. And the earlier and more intently you pay attention to those, the better you will be equipped to discover fraudulent brokerage firms. And the faster you will be able to run from them.
  • You don’t have to trade

    In fact, numerous research works by market-monitoring platforms have suggested that there is an intractable link between overtrading and underperformance. That is, traders who take the most trades tend to perform the worst.

    Hence, you have a higher likelihood of being better off by taking few, quality trades. As far as Forex trading — and indeed, almost every other trading activity— is concerned, it is not about the quantity of your trades. Instead, it is about their quality.

    Of course, it would be tough to internalise and practice this tip. It is revolutionary and most traders, with many blogs, multiple signal services, and numerous self-acclaimed trading gurus screaming “Act! Trade! Plunge into the market!”, will find this tip hard to apply.

    This is not to make you an indecisive or inactive trader. Instead, this tip aims to help you develop the ability to think clearly before you take any trade.
  • Do yourself a favour by spreading your risk
    Do yourself a favour by spreading your risk. This is how. Take a pledge that you would not concentrate your trading efforts on two or three currency pairs that are too highly correlated. That may sound counterintuitive but it will amazingly improve your trading results.

    The reality of the Forex market is that most of the currency pairs are positively correlated. That is, they tend to behave in similar ways. For example, all other things being equal, if the New Zealand Dollar (NZD) is enjoying positive investors’ sentiment because of say favourable economic policies of the country, the currency can gain against every other currency, across board. Such scenarios are not uncommon in the Forex market.

    The best way to manage this effect is to spread your risks across uncorrelated pairs. Hence, your focus should be on taking few, quality trades on uncorrelated currency pairs. This will help you to hedge your risks and also reduce your fees.
  • Be reasonable with the use of leverage

    Leverage is a tool that makes Forex trading attractive to most. It enables Forex traders to make money by putting just a little money upfront. Also, with leverage, profits in the Forex market are magnified.
    However, it has a disadvantage: as it can magnify your gains, so can it also increase your losses. As a result, the higher the leverage you use, the more cautious you should be. For example, if you are using a leverage ratio of 200:1 on a $200 standard account, your trading capital becomes magnified to $40,000 ($200 × 200).

    That will enable you to control positions that are worth 200 times the size of your deposited amount. You must, therefore, note that as highly useful as the concept of leverage is to Forex traders, it can also plunge them into their ruins. Hence, you should deploy it cautiously.
  • Use adequate risk management techniques

    Also, learn to use adequate money and risk management techniques. On every trade you take, set stop-loss and take-profit prices based on your desired reward/risk ratio. The most recommended one is 3 to 1. That is, on every trade you take, you are willing to risk a pip to gain three.

Another risk management technique you should adopt is steering clear of the market whenever there is a significant economic announcement or news. The market responds to fundamental data, and you should factor this in before you trade.

Finally, trade only the longer time frames as they are more orderly, less confusing, and more profitable than the shorter ones.

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