How to manage risk when trading forex

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Forex trading in Canada: Why the trend is growing

The foreign exchange markets have become increasingly popular and the average daily turnover in the UK as of 2019 stood at more than $3.5 trillion. But that does not guarantee success for the individual and if you’re new to forex trading, it’s important that you understand the risks involved.

Getting results as a forex trader involves lowering your risk, so what measures can you implement to help you achieve that?

Yes, there are opportunities to turn a profit but the possibility of losing money is very real and always exists, no matter your level of experience. The key is in accepting that truth and taking all the steps you can to guard against it.

Do your research

Before you begin, it’s vital that you understand the market(s) you’re operating in. You can’t afford to make rash decisions about the trades you execute because that lack of supporting rationale is only likely to end in failure and lost capital. Instead, take the time to study the trends in the various currency pairs and what influences their movements. Only by enhancing your knowledge will you be able to make more informed trades, which will lower the level of risk.

Trade within your limits

Part of your strategy should be devoted to creating a budget within which you will work. That means defining how much you can afford to lose in the event of the worst-case scenario. And if that does happen, don’t trade with money you don’t have in an effort to recoup your losses. This could cause you to make risky decisions that you wouldn’t make if you were thinking objectively.

Stick to the plan

If you’ve formulated a strategy, don’t deviate from it. If you decide to trade only the most popular currency pairs because that’s what you’re familiar with, it’s a perfectly legitimate approach. Scalpers, for example, tend to only trade in the major currencies because of their greater liquidity. So, don’t feel the need to branch out too far into alien territory, because the risk there will be higher for you than it is for those with experience in those areas.

Use stop-loss orders

You can use stop-loss orders to instruct your broker to sell at a specified price. This is typically done when the trade is first executed and is designed to limit your losses even if the pips continue to fall beyond the benchmark that you’ve set.

Set your risk/reward ratio

This is another key element of your strategy. You need to identify how much capital you’re willing to lose as well as how much you’re hoping that initial investment will return. If it’s too great a risk for too little reward, it might be prudent to explore other possibilities.