Currency trading risk is one of the realities you should remind yourself over and over again. Thereby, the goal of each strategy connected to the risk is to minimize it.
For this reason, specific trading strategies can help to reduce and minimize losses. As trading is all about endurance, keeping yourself afloat is a viable strategy. Similar to increasing earnings, any act of minimizing risks leads to better profit scores.
For example, the trader that gained 4% during the week may risk it all during the next. When not managing your currency trading risk, you may end up losing your game very soon.
In the following lines, I will help you to stay in the game. By providing insights from my own trading experience, you can advance in this game.
Stop Losses and Trailing Stop Losses for Currency Trading Risk
As you are aware, stop losses are very important for reducing currency trading risk. And if you are not aware – you should be!
There must be a good reason why the majority of traders use them. It is because they will crucially mitigate losses since calculated utilizing the variety of technical analysis.
These are important as the wrong decision can lead to stopping loss, but also to reducing profits. Imagine getting out of the position too soon. If you set your stop loss too tight, you can get out of the market too quickly. You are thereby losing some possible profits.
While a position is open, you can use stop loss to reduce or minimize losses by trailing them. Let’s take an example of a position open on the forex market that is in profit by 50 pips. If your stop-loss was set 50 pips away from your entry point, then it could be an excellent option to move your stop loss to break even.
By behaving this way, you will minimize any potential loss if the trade turns around. In the case of the position moving further into profit, this way, you are protecting any gains you have made.
You can use stop losses in a variety of different ways. I would urge all of our readers to use them effectively.
How Much Should you Risk on Each Trade?
Another way of managing currency trading risk is by reducing the percentage of risk per trade. A lot of professional traders will only risk 1% of their trading capital on any single trade. Seemingly, it can go up to 3%, but anything above is craziness.
Seemingly, this is perfect for managing risk as you keep your losses at a minimum. Therefore, there is very little chance of significant losses if you stick to these risk parameters.
Similarly, they will also reduce risk if you have any positions in the market that are subject to any spikes in price or black swan events.
An example of a 1% risk parameter will be if you have a $50,000 account. Thereby, a 1% risk would be $500. Regardless of the size of your stop-loss, you will only be risking $500 on any trade. In this case, it is small in comparison to the account size.
Of course, you can increase it to 2% or 3%. However, we suggest using the 1% strategy as it seems to work for traders. Furthermore, it helps new and inexperienced trainers from blowing their accounts.
Therefore, we strongly advise new and inexperienced traders to stick to the 1% rule.
Risk Reward Ratio
Unlike the tips above, it is a model of setting up the ratio. Of course, you should still have a focus on the left side and try to minimize risks.
However, this is a ratio of what you are risking and what you are getting from the trade. For example, your risk-reward rate of 1:1 means that you need to be right for 50% of the time.
Of course, this is reducing the currency trading risk, but not making profits. Therefore, setting your goals at a 1:3 risk-reward ratio is better. In this case, you need to be right for only 25%.
Following this, while at the same time risking only 1 or 2% of your account – you can make some incredible profits. Of course, if your predictions are wrong, you are in a drawdown scenario.
Always remember that risk management is a crucial part of trading. By manging currency trading risk, many traders are successful in the markets.
On the other hand, profitable traders may turn into losing ones very quickly. Staying in the game as much as possible is a prerequisite for a successful trader. Therefore, don’t make rash moves and play it for long. Eventually, it will make a difference.