In Forex trading, no matter how sure you are of the outcome of a trade, you are still making just an educated guess. The FX market can move fast, and gains can turn into losses in a matter of minutes, highlighting the need to properly manage your account. The ill-prepared trader can lose a big chunk of his hard-earned money in minutes. Nonetheless, even though risk is inherent in Forex trading, it is never unmanageable.
If you can measure the risk, it can also be mitigated. And one way of measuring this risk is through the use of fundamental and technical analysis. These disciplines help you calculate the odds of your trade being successful.
Another risk management strategy that financial experts suggest is the 2% rule which asserts that you should never risk more than 2% of your total trading capital per trade. What this rule basically says is that you should limit your losses to 2% in every trade. That is, if the difference between the buying price and current market price is already equivalent to 2% of your trading capital, it is best to close that position to prevent further losses. This strategy can also be done proactively, meaning, the risk is predetermined prior to opening a trade, and avoiding excessive losses by strategic placement of stop orders. This strategy prevents emotional decision-making like lingering on a losing position believing that the market will turn in your favor anytime soon, which often leads to further losses. Apart from mitigating losses, stop orders are likewise utilized to secure earnings.
One of the interesting features of Forex is that it is highly leveraged, far greater than other asset classes, like stocks. Leverage allows traders to control a large position for a small cash outlay. For instance, if the brokerage firm allowed you to trade at a 5% margin, you can control a lot worth USD 10,000 by paying USD 500 upfront. If the position closed at USD 11,000, you have already gained USD 1,000, which is twice the amount you used to purchase the said contract.
As pointed out in that scenario, trading at a margin can truly amplify gains significantly. Then again, using margin to create leverage is also one of the risk magnifiers of the Forex markets. If the market moves unfavorably, leverage will greatly magnify your losses. Hence, you should only use leverage when the advantage is clearly on your side, and if you know how to manage it, like using stop-loss orders. Those who are new to the currency market, and those who have a carefree attitude to trading, are advised not to use margin to leverage their positions.
If you can measure the risk, it can also be mitigated. And one way of measuring this risk is through the use of fundamental and technical analysis. These disciplines help you calculate the odds of your trade being successful.
Another risk management strategy that financial experts suggest is the 2% rule which asserts that you should never risk more than 2% of your total trading capital per trade. What this rule basically says is that you should limit your losses to 2% in every trade. That is, if the difference between the buying price and current market price is already equivalent to 2% of your trading capital, it is best to close that position to prevent further losses. This strategy can also be done proactively, meaning, the risk is predetermined prior to opening a trade, and avoiding excessive losses by strategic placement of stop orders. This strategy prevents emotional decision-making like lingering on a losing position believing that the market will turn in your favor anytime soon, which often leads to further losses. Apart from mitigating losses, stop orders are likewise utilized to secure earnings.
One of the interesting features of Forex is that it is highly leveraged, far greater than other asset classes, like stocks. Leverage allows traders to control a large position for a small cash outlay. For instance, if the brokerage firm allowed you to trade at a 5% margin, you can control a lot worth USD 10,000 by paying USD 500 upfront. If the position closed at USD 11,000, you have already gained USD 1,000, which is twice the amount you used to purchase the said contract.
As pointed out in that scenario, trading at a margin can truly amplify gains significantly. Then again, using margin to create leverage is also one of the risk magnifiers of the Forex markets. If the market moves unfavorably, leverage will greatly magnify your losses. Hence, you should only use leverage when the advantage is clearly on your side, and if you know how to manage it, like using stop-loss orders. Those who are new to the currency market, and those who have a carefree attitude to trading, are advised not to use margin to leverage their positions.
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Forex trading is a great way to earn money, but it is not devoid of risk. While risk is inevitable, it is still manageable. Follow this link to get ideas on how to protect your Forex account from losses.
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