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In forex trading, you’re exposed to a lot of risks. And because of that, you can’t ignore the fact that you have to have a clear risk management strategy. You can fail without it even if you sport the best trading system in the whole world. Let’s dig deeper into forex risk management.
Its Importance
It’s practically one of the most important concepts in forex trading, and you need to have a strategy if you want to survive the turbulent market.
Anyhow, it’s always easier said than done.
While it’s true that if you want higher returns, you must be willing to take on more risk, it’s also true that you have to focus on which risks are worth taking. It’s quite tempting to pursue something grand even if it means burying one of your legs. Here’s where risk management comes into play—and it plays a major role at that.
Control Your Losses
Controlling your losses is one of the key goals of risk management. You have to know when to stop and cut your losses on a trade. This is where you may use a hard stop, or a stop loss order, or a mental stop, or the limit you put on the pressure you’re willing to take for a trade.
Further, when it comes to placing stop loss orders, you may feel that doing just that is a science in itself. Well, you’re right. However, the most important thing to remember is that it has to be placed in a way that limits your risk, but still lets enough space for further earnings.
It’s a common mistake for traders to sometimes ignore their stop loss orders when they feel too confident. This is something you must avoid at all costs. Once you place a stop loss order—or any strategy, for that matter—you must stick with it.
Use Correct Lot Sizes
You may be disappointed with this, but there’s actually no key working formula for determining the most suitable lot size for you.
However, there’s one basic reminder for starters: smaller is better. You have your own risk tolerance level, which is unique for each trader. As a newcomer, you may want to be conservative, as much as you can.
Also, keep learning about lot sizes. Try to dig deep and understand the dangers of using bigger lot sizes with a small account balance. If you keep a smaller lot size, you will grant yourself some wiggle room, and you can stay flexible and manage your trades.
For this one, use more logic than emotions—that’s also true for all concepts in smart online trading.
Conclusion
When you do risk management, what you’re basically doing is keeping your risk under control. You can’t remove risks altogether. They’re inherent in any form of investing. Just keep thinking that forex trading is about opportunities, and you have to act upon them once they present themselves. Along with it is your strategy to minimize risk with every opportunity you see. In other words, the way you manage your risks can become the difference between a becoming a champ and being a loser. You can also check experiences of other traders by searching forex online reviews.
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