Because traders enter the forex market to make a profit, the ultimate risk they seek to avoid is losing money. There are multiple routes a trader might take to reach this unfortunate destination. There are also a variety of safety nets a trader can put in place to avoid experiencing too much loss.
How to Reduce Risk in Currency Trading
Use Stop-Loss Orders
Using stop-loss orders with every trade is the best tool to have for limiting risk. A good rule of thumb: only move the stop-loss order to protect profits. Analysis and risk calculations should be done before the trader opens position. Set the stop-loss order and stick with it.
Track the Market
Staying on top of the changes in the market helps a trader avoid too many unexpected events. It is important to have thoroughly researched the currency pair being traded and to know the data and events scheduled in the days or weeks to come.
Take a Break
This may sound like peculiar advice. However, taking a brief break from trading can offer a trader fresh perspective. During the break, take advantage of the free time to fine tune charting and fundamental analysis.
Keep Positions to a Minimum
The larger the position, the greater the potential risk. High leverage ratios can be tempting. Instead, request low leverage ratios from forex brokers to systemically limit leverage utilization.
Carefully Select Currency Pairs
The trader should be aware of the currency pair’s uniqueness because risk varies from one currency pair to the next. Every currency pair carry either a higher or lower margin utilization and pip value. Develop a plan reflective of the currency pair’s unique characteristics.