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Trading in foreign exchange or forex is full of financial risks that you can control in several ways. Forex or FX refers to global and OTC ( Over the Counter Market) where institutions, banks, investors, and traders buy, sell, exchange, and speculate on world currencies. The forex market is affected by many factors, such as politics and other world events.
When trading, you also act as a Risk Manager who must control and reduce risk as your primary goal. Here are some ways to mitigate the risks while trading in forex.
1. Trading with a Hard Stop Loss
You can mitigate risk exposure in the forex market to place a hard stop loss per trade rather than a mental stop loss. A hard stop loss is active and is executed when the prices reach a certain level. Hard stop loss is automatic, and once you place it, you do not have to do anything further. A mental stop loss is a level at which you decide to exit the trade, but you have not yet started a stop-loss order.
The major problem with a mental stop is that being open-ended allows the trader to have too much wiggle room. When you reach a mental stop, you might justify hanging on to the trade even though you know it does not benefit you. A hard stop forces a trader to get out of that particular trade and eliminates the feelings associated with losing a trade.
2. Avoid too much Leverage
The FX markets offer no guarantees of making profits. If you do not learn how to leverage responsibly, you might end up blowing up your FX account at some point. Most new traders make the mistake of choosing a broker offering them the highest leverage, and they trade using most of this leverage, which is a failure recipe. Trading at maximum leverage will cause you a lot of financial losses. To make profits in the FX market, you have to gun for the long term.
3. Do not Trade in Volatile Markets
Volatility is useful for traders as it allows you to profit from the movement of prices. However, this particular piece of advice is intended for short-term fluctuations such as the one caused by high level and scheduled events or other events that can swing prices.
These high-risk events can cause over 100 pip movements in a few seconds. There are zero edges in trading during such times, and the best way to mitigate risk is to break from trading for a while, and if in an open-position, reduce risk by reducing your position size.
4. Do not put up More than 2% for each Trade
The 2% rule is the recommended amount per trade, and some will put up 1.5% of their capital as a fixed fractional risk. Adhering to the 2% rule saves you from blowing up your forex account from several losing trades.
To ensure you have a good chance of resuming breakeven after you experience a drawdown, you should keep the risk exposure level to 2% or slightly lower if you can. This ensures you stay in the trade for the long term while using a forex MetaTrader allows you to predict and calculate your options efficiently.
5. Stay on Higher Time Frames
Overtrading is a risk most traders are getting into by focusing on short term day trading plans or scalping. This is because they wrongly assume that the more trading they engage in, the more profits they can make, which is very dangerous to their bottom lines.
A swing trade time horizon is a trade held for at least two to ten days. Usually, a swing trade option is 240 minutes, 480 minutes plus the daily charts. The chart patterns, resistance, and support levels found on the higher-level timeframes are legitimate and give you a better success probability.
Staying along these timeframes benefits you and decreases the risk in different ways. It helps you reduce your overtrading impulses on smaller timeframes and focus on higher time scales. You also significantly reduce your transaction costs, such as commissions and bid-ask spreads, which reduce your profits.
Conclusion
All professional traders worth their salt will tell you that controlling risk is equivalent to long-term stay and success in the forex market. You have the responsibility to follow the necessary process to ensure you trade for longer and make profits while at it.
