How To Minimize Risks When Trading Forex

How To Minimize Risks When Trading Forex

Many people that aspire to become a successful trader (imitating the famous businessmen who made their fortunes by insider trading) believe that there are tricks to make money with forex trading. There is talk of secret tips, and information that only few people know that in the right hands can secure really high earnings. In reality there are no “secret tricks for forex” but certainly there are some “tips” that many people ignore; the knowledge that can make a difference if followed down to the letter.

Of course, before you enter the Forex world many have wondered whether it is worth investing or not. The risks are present and tangible, but as can be found in every aspect of daily life, so the focus of the discussion revolves around how to manage these risks.

The point lies in the word “safe returns,” but nothing is guaranteed. Risk is the daily bread of every trader, even millionaires. When you make a transaction on the stock exchange (whether the currency market or a stock or bond index) there is always a risk margin to take into account. Surely those who earn on forex investing large sums and consistently over time have the tools and information that beginners do not possess.

One cannot speak of real tricks but no doubt the follow an operational strategy to trade forex is the starting point for dramatically increase not only their own gain, but especially the factor of long-term success. Instead, using a trading system that works (and then tested on the basis of historical quotes) you can work on forex professionally conscious of having in his hands a winning method that is based on logical trading.

Breaching Trading Discipline Rules

One cannot deny that trading is associated with big emotional involvement. But a sign of a good trader is being able to curb the emotions standing in the way of clear vision of financial perspectives. The wise strategy is to take the good with the bad cool-bloodedly; a successful trader is the one who faces several smaller losses over a few bigger wins. Fretting makes traders fail, since when one is motivated either by fear or by desire to beat a market, disappointment is imminent. The best thing to do when starting the career of a trader is to work out a plan with care and precision, and maintain good discipline while engaging in trading operations.

No Trading Plan Approach

Speaking of a good trading plan. Before starting to pursue the career of a trader, it is necessary to think over a trading plan. It should be put down to paper and include strategies for managing risks and holds the expected revenue values, or expected return on investment (ROI). Sticking to a plan is a vital back-up that will always give a clear vision if you are in emotional haze because of fear or anxiety, and will keep you from making mistakes. It is erratic to think that relying on intuition is what keeps the pot boiling for successful traders. Plan is not something universal and set in stone, and another mistake that can be made is not paying attention to what is actually happening in real time.

Excessive Rigidity Of Trading Plan

No matter how good a trading plan is, the market is a constantly changing matter, so there is no possible way to work out a general and universally applicable plan. Before opening of the market you should revise your plan, but just as well you should adapt to its changes. The quicker the reaction to the market changes, the more successful the trader. Not a single strategy can be winning for any long period of time, the true agility is what distinguishes a good strategists. The ability to choose among a large arsenal of tools guarantees success at the market, while abiding by just one rule is a disabled approach. Learning from one’s mistakes is also a sign of a skilled broker.

Setting Unrealistic Objectives

If you expect to get rich overnight with forex, you are in for a rude awakening. Earning with forex requires knowledge, experience, analytical skills and discipline. Risk management rules are designed for a good reason: they keep traders from putting on a stake more than it is reasonable to risk with and not justified by expected revenue. Forex is not about gambling, it is about adhering to a thoughtfully calculated plan and not letting emotions rule your hand. Another thing required is patience, because accumulating gains and learning from previous planning mistakes is what will get you far in the long run.

Fallacious Risk Management

In trading, talking about risk refers to the probability of losing money. Managing risk, then, becomes of vital importance to anyone who approaches this type of activity. Managing risk, in other words, one must also be aware of the risks involved in the style and the trading system used, and the knowledge of the exact amount of money that can be lost.

The task of risk management should not only be prior to trading, but it must be constant over time, since we are talking about numbers that should never be left to chance. The risk is always there in the trading and every trader should constantly evaluate not just wondering “how can I win?” but rather placing the question “how much can I afford to lose?”

It is extremely important that those who decide to invest, do it with money they can afford to lose. This means that we must decide to risk their savings for their children’s education, emergencies or mortgage payments. When you open a trading account you must be aware of the possibility that it can be emptied and the consequences that such an event could have.

Leverage Management

Unlike other financial markets where you require the full deposit of the amount traded, in the forex market there is only need a deposit of margin. The rest of the amount will be granted by your broker. An effective leverage should provide up to 400:1 depending on the risk profile and the chosen broker. 400: 1 means that you will only need to invest 1/400 in the budget to open a position (plus the floating losses). According to this system, it is necessary to have only 0.25% of the total exchange. For example, if you were to negotiate a standard lot using 400:1 (which is equal to 100,000 units of the base currency) you would only need $250 ($100,000 / 400 = $250) for indirect currency pairs [USD quoted as the base currency] .But attention, high leverage can lead to both massive losses as well as substantial profits.

There are two things to consider about the scope of financial management:

  1. Margin allows you to keep our risk capital to a minimum as a small amount of money is being used to conduct a larger transaction.
  2. The greater the leverage used, the more risk capital is at risk.

A margin call is the worst enemy of traders. Unfortunately, this can happen to anyone, partly because of poor money management techniques (or not using it at all) and partly because of the lack of awareness. A margin call occurs when the account balance falls below the maintenance margin (capital required to open a position, such as $250 when you use 400:1 or $1,000 when using 100:1 on a standard lot). In a margin call your broker sells off (or buys back in the case of short positions) all exchanges. Even in this case, most of the forex brokers automatically calculate this value, but it is good to know how this number is calculated.

One wants to have the following currency pair EUR / USD at 1.2318 on a standard lot using 100:1 or 1% margin.

He or she bought 100,000 Euros at $123,180, so that the maintenance margin is $1,231.80 USD (123 180 x 1%).

If the trader had used 200:1 ratio to 0.5%, the margin would be $615.9 (123 180 x 0.5%).

For direct currency (or currency pairs where the USD is the base currency), this calculation is simple. Since the transaction is in USD, we just need to get his percentage as follows: if we go long USD / CHF at 1.1445 on a standard lot, we are using 100:1.

We bought $100,000 and paid 114,450 CHF for them, so that the maintenance margin in US dollars is US $1,000 (100,000 x 1%).

To Sum It Up

Forex is now universally recognized as probably the largest financial market on the planet, largely due to the amount of transactions that are made in it. Every single day, the forex market is home to around 2,000 billion dollars in multiple transactions. The forex market is therefore very “liquid”, for this reason, the only way to operate there with good success is to always consider its leverage.

As is the case with any other type of brokerage, it is always best to look before you leap. Before you even start considering earning with forex, you should get along with people who are in the know and can share their trading techniques with you. Choose you role models carefully, learning from the most successful. Learn from the mistakes made by others, and since you will inevitably make mistakes of your own, you will be able to benefit from avoiding at least some of the erratic decisions that await all novices. This will teach you to plan realistically as well as discipline you.

Conclusion

Many of the factors that cause forex traders to fail are similar to those that plague investors in other asset classes. The simplest way to avoid some of these pitfalls is to build a relationship with other successful forex traders who can teach you the trading disciplines required by the asset class, including the risk and money management rules required to trade the forex market. Only then will you be able to plan appropriately and trade with the return expectations that keep you from taking excessive risk for the potential benefits.

The winning approach is to be adaptive and sufficiently savvy; use psychology to help you along the way to the extent of detecting your emotions such as fear, greed or anxiety and crush them in the bud before they make you risk more than it is reasonable. To avoid trading remorse, you should learn the technique of planning beforehand and disciplining yourself in order to follow the plan, but at same time you need to be flexible in order to achieve success. And remember that patience is the key to become a good forex earner.

User Rating: 5.0 (1 votes)
Sending