Is Forex trading risky? Yes, it can risky if you proceed without proper risk management. It is a most risky form of investment due to the availability of leverage. New traders can reduce the risk by developing a solid trading plan and by learning proper risk management. Risk management can make a lot of difference between your sudden death and your survival with currency trading. It is a combination of various ideas that can help you to control your trading risk. It can be; knowing when to take losses, trading only during the peak hours or limiting your trade lot size.
Risk management is an important factor in currency exchange since it helps you to survive in the foreign exchange market. It is a concept easy to grasp but difficult to apply. Forex brokers in this industry talk only about the benefits of leverage but do not discuss its drawbacks. Proper knowledge of leverage helps the traders to enter the foreign exchange market with the mindset that they are taking large risk and aim to earn big bucks. It seems quite easy for those who have used leverage on a demo account, but when emotions and real money come, things change. At this stage, true risk management is important.
Controlling your losses in Forex trading is an important form of risk management. You should know when to cut your losses during a trade. You can use a mental stop or a hard stop for this purpose. A mental stop is to set a limit to the pressure that you can take during a trade. A hard stop in online trading is one which you set as a stop loss at a certain level when you initiate your trade. Setting a stop loss is a science but the main thing which you should take care is a way that reasonably limits your risk during a trade. Once the stop loss is set, stick with it. Do not fall into the trap of moving your stop loss farther because by doing this, you will nor cut your losses but it will spoil you in the end.
Using a correct lot size is also important to minimize your risk. There is no magic formula to figure out the lot size in Forex trading but you should start with a smaller lot in the beginning. As a beginner it is always recommended to start with 1-2% risk on per trade and at the max 3 trades active at given point of time.
You should understand the risk of using large lots with a small account balance. You can easily manage a smaller lot size with logic rather than emotions. Using a small lot size for currency trading is a good thing but it will not help you if you open too many lots.
Another important thing is to understand the correlations between currency pairs. Suppose if you go long on USD/CHF and short on EUR/USD, you are exposed to USD two times and also in the same direction. If the USD goes down, you will get a double dose of pain. So it is better to keep your exposure limited to reduce the risk. Basically risk management is to keep your risk under control. You can be more flexible by controlling your risk at this vulnerable Forex trading platform.
If you are able to follow above mentioned rules and make it a habbit No once can Stop you from becoming best Trader in this world
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