3 Ways To Lower Your Risk Exposure While Trading Forex


Trading foreign currencies (Forex) is often perceived to be risky and dangerous due to the highly volatile nature of the Forex markets. However, that need not be the case if you have these 3 safety measures in place.

1) Insist on using stop losses

Professional traders always insist on adding a stop loss to their trades. You never know how fast a trade can reverse and how far south it can go. To ensure that your capital doesn’t get wiped out just because of one bad trade or a freak accident on the Forex market, be sure to use a stop loss.

Successful traders go one step further by monitoring and adjusting their stop losses according as their trades go up so that they do not lose the profits they have already earned. It is every trader’s goal to achieve no risk trades as soon as possible.

2) Decide On A Risk To Reward Ratio Before Trading

The mark of a good trade is one where you risk very little in exchange for the possibility to gain very much.

Disciplined traders would take calculated risks to enter a trade with a predetermined risk to reward ratio. If the potential reward is not worth the amount of money they are risking, they would happily forgo the trade.

On the other hand, amateur traders often jump into a trade without any targets in mine. While there are the greedy few who make the mistake of risking a lot of money for an equally huge gain, the worst types of traders are those who risk a lot of money for the possibility of a small gain.

Naturally, such traders would find it very hard to make money consistently via Forex trading.

3) Follow A System Strictly

Earlier this year, I had the chance to interview several successful Forex traders. What I noticed is that they all have a set of systems that they follow strictly. The interesting thing I noticed was that their success was highly correlated to the degree which they followed their system.

It was worth noticing that most of their losses usually happen when they deviate from their system for that particular trade.

While each of them enjoys different degree of trading success depending on the type of systems they use, all of them had their risk exposure greatly reduced because of their systems.

This is because within each of their system, they have built in a risk management strategy that would reduce their risk per trade.

On the other hand, amateur traders often overlook this simple fact and allow their emotions to take over during their trades. As a result, they may find themselves making money in the short run, but losing much more in the long run.

The lack of a system does not give amateur traders a chance to evaluate their own trades based on a well defined set of criteria. Without doing these evaluations, it’s little wonder why amateur traders keep losing money while committing the same mistake over and over again!

Image Credits: marhaba.com.qa

Know of other ways to reduce your risk while trading Forex?

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