Risk management is one of the most important aspects of forex trading as it will protect your account from losses and allow you to keep trading even after a loss. A lot of new traders do not implement the proper risk management strategy and often have one single loss which wipes out their profits and erase their trading capital.
Without proper risk management no trader will succeed over the long haul and therefore it is very important to learn how to properly manage risk. Once a risk management plan is in place in order to protect your forex portfolio it is also very important to implement it.
Here are 7 tips for risk management of your fore portfolio
Forex Trading Account – It is very important that you chose the proper forex trading account for the amount of trading capital you have. Should you have less than $10,000 you should open a mini-account, above $10,000 you can open a standard account.
Sufficient Trading Capital – Plenty of new traders make the mistake to operate their forex portfolio with insufficient trading capital which makes risk management almost impossible as a minor move against the trader would have to trigger stop loss orders or hedges. Make sure you have enough trading capital and the proper account.
Proper Lot Sizes – The higher the lot size the higher your profit as well as loss per pip. It is important to trade the proper loss size so that you can endure a move against your trade. It is almost impossible to time every trade right and it is natural that the currency pair your trade may move 50 pips against you before reversing and turning a profit. Apply the correct lot size so you can execute a proper trading strategy.
Correct Percentage Levels – The opinion about how big of a loss per trade you should accept lies with the trader, but the majority will have it set between 1% and 3%, more aggressive traders could tolerate 5% of their trading capital. Again, the decision needs to be made by the traders, but the above ranges should fit almost all retail traders.
Excellent Trading Strategy – Risk management is put in place in order to protect your forex account, but a proper trading strategy is required in order to grow your account. Take your time to develop the proper trading strategy for you and then modify your risk management protocol.
Avoid Over-Exposure – A lot of new traders are over-exposed to one currency. For example they will take short positions at the same time in the EURUSD, GBPUSD and AUDUSD. Keep in mind that the USD is the quote currency on all three pairs and often they will experience a similar move.
Proper Mindset – Every trader needs to have the proper mindset and understand what forex trading is. Educate yourself first and fully understand the forex market. Have realistic expectations and execute your trading plans. It takes time to build up your trading portfolio so do not rush into and take it one step at a time.