As is true with every type of trading, there are no guarantees when trading in forex. Whether you’re trading on the stock market, in futures or in options, it’s the same. There is an element of risk in all types of trading. Obviously, the more you invest or the higher your trades, the more you have to win (or lose). Understanding how to trade in order to minimize risk levels is fundamental to entering any type of trade.
How Minimizing Risk Works
Before placing your first trade it is important to understand how much you are able to risk. While you hope to win on every trade you make, that is never realistic. So think about risk before entering the market. This begins by evaluating your financial portfolio. Review your current financial status to come up with a reasonable amount of disposable income. This is money that you can live without if you must. By realizing that every deal you make will not end up with a profit, you should determine exactly how much you can afford to lose without affecting your style of living. In addition, you won’t be held back from possible deals by the fear factor – the fear of losing it all. If you don’t risk it all, you can’t lose it all!
Although there might be specific percentages quoted as risk levels investors should follow, the trader’s individual personal financial situation is the most critical. This means that the amount you invest in any particular trade is not based only on a percentage of what you have in your forex account. It takes into account your entire net worth. This should result in the amount of actual money you can risk on each trade. Base your own risk tolerance on how comfortable you will feel with a loss. This might take some trial and error, but one way to tell if you’ve moved in a risky direction is by self-reflection. Are you checking the market every second when you should be focusing on your family or work? Are you kept awake at night worrying about if you’re over-extended and what will happen if you lose on a trade? Those are some of the triggers to watch for.
Keeping it Simple
Whether you’re planning to be trading full time or only as a part time trader, consider how you would feel if you lost it all. How that would affect you in every aspect of your life? You can’t second-guess every trade you enter and you don’t want to be held back by the fear of losing everything. So don’t risk too much. By setting a dollar limit or a percentage level that you would be able to live without, you can follow your intuitions and enter deals that fit into your trading style. The thing to remember is that you won’t always lose and you won’t always win, but be prepared for either scenario.