9 recommendations for smart risk management in Forex
The proper management of risks involved in trading in the Forex market allows earning a regular income in the long-run. There are some recommendations concerning the risk control.
A trade must be opened only under the right conditions that meet the criteria of a trading algorithm. A trade opened without performing a preliminary analysis carries additional risks and will be very likely closed at loss eventually.
Analysis of the market conditions requires a trading system, which represents a set of rules that helps a trader to decide on whether to open one or another trade or not. Unsystematic trading without a clear algorithm can result in a partial or total loss of a trader’s capital.
Limit of daily losses
A trader needs to determine the daily limit of loss that mustn’t usually exceed 5% of total capital. In simple words, if a trader’s capital reduces by 5% during a day, it is advisable to stop trading at least until the next day and analyze possible mistakes. It enables to avoid rash and spontaneous actions, which can entail even more serious losses.
Limit of losses for every trade
It is recommended to risk no more than 1-3% of total capital. This is required in order to eliminate a possibility of a severe drawdown in case of a series of losing trades. If the risk per every trade is limited to 1%, 10 consecutive losing trades will result in 10% of total capital. Such a minor loss can be easily compensated in the future.
Every trade must have a limit of losses. Trading without a stop-loss can turn into significant losses in the long-run. Any unpredictable event (for example, 9/11 terrorist attacks) can break the financial market in a split second. If Stop-Loss order is not placed, it can seriously damage your account.
Trading with the trend matters
The market trend will generally continue to move in the original direction rather than reverse. Trading against the trend may well result in high risks and low expectation value, since the probability of closing a counter-trend trade at profit is always lower.
Analysis of mistakes
Every trader makes mistakes in the course of trading from time to time. You need to fix all your mistakes on time not to fall into the same trap.
If you’re in doubt, stop trading
If a trader is doubtful of his/her trade or the market direction, it is recommended not to open positions. Better not to earn money than to lose them. Be assured that the market will allow you to open a nice position in the future, if you show your firmness and patience.
Control your emotions, while trading
Don’t let your emotions control you, when you’re trading. Otherwise, any decision to open a trade will be prompted by your emotions, but not a common sense and a systematic approach. It will result in higher risks and a possible loss of capital in particular cases.
Don’t invest the last of your money
It is advisable to invest available funds in trading in the financial markets. If a trader follows the advice, he/she will not incur severe financial losses and his/her way of life will not change as a result of making the wrong decisions and a possible loss of capital. It is strongly recommended not to use borrowed funds (credit, debt, the cash from the apartment sale, etc.), when you invest in the financial markets. You can experience severe consequences in your everyday life, if you lose that money.