When it comes to the online trading of Forex, your success rises and falls with your ability to manage risk.
Getting a grip on risk to doesn’t have to be hard, but it takes constant awareness of the market and your position in it. Limiting your trade lot size, hedging, trading only during certain hours or days, and knowing when to take losses are good rules of thumb.
Managing risk is an easy idea for people involved in the online trading Forex industry to understand, but harder for them to implement in practice. In many ways using leverage has more benefits than it does disadvantages, and this sometimes encourages traders to take large risks.
Novice traders who were successful in their demo accounts get on board actual trading only to find out the hard way that real world is different. When real money is involved, the mindset toward online trading Forex tends to change.
Perhaps the most important way to manage risk is knowing when to cut your losses on a trade.
There are a number of ways to do this. One way is to decide on a cut-off point on your trade before you execute it. Another way is to set a limit on how much downward pressure you’re willing to tolerate on a trade. These two strategies are known as ‘stop loss’ for obvious reasons.
The overriding point is to figure out a way that reasonably limits your risk on a trade, and to decide on a level of risk you’re comfortable with. Once online trading Forex people set a stop loss, they should follow it religiously. Do not fall into temptation and widen your stop loss threshold as you trade.
While it is a good idea for online trading Forex people to reduce their lot sizes, it will not help lower your risk if you open too many smaller lots. It is also important to understand relationship between currency pairs. For example if you go short on EUR/USD and long on USD/CHF, you are exposed to risk twice.
Risk management is all about keeping a handle on your risk. The more controlled your risk, the more flexible you can be when you need to be.