How to Control Risk in Forex Trading


Success in forex trading depends if a trader focusses on how not to lose the money. It may be possible if the risk is managed efficiently. The risk in forex trading arises due to various reasons. One of them is high leverage. If the leverage is reduced or minimized, then the certainty of winning trades increases, at the same time, the amplified profit number shrinks which is the glamor of forex trading.

How to Control Risk in Forex Trading

Must place the stop loss properly

Trading the plan is one way to minimize risk because one is ready to bear the anticipated loss in one particular trade forehand. Any plan that is not programmed into the system does not work. Therefore, it is a must for traders to place the loss and profit point on to the platform. The stop loss level should never be varied beyond the decided drawdown level, however, the take profit can move beyond the profit target with a trailing stop loss.

Carefully choose the size of the trade

Minimizing the exposure is another way of minimize risk. The trader exposes 5-10% of the capital in a trade though the prescribed exposure is 1-2% that might not be applicable in case the equity size is small. The size of the trade could be anything but loss level must be followed with firm determination, come what may. When the equity remains in the account, the market gives many opportunities, therefore, keeping the fund available for future trade must be paramount.

Hedging can be an effective tool

There could be another way of controlling risk with the help of some additional expense. When a future contract is bought or sold, the same position can be hedged with the reverse option buying reasonably. For example, if the trade is in long side and if it is expected that that the trade is might not move in favor, there may be two ways to avoid this. One, by exiting the trade or second by buying a put option of the strike price close to the entry. The quantum of loss in the bought future will be minimized with the  profit in the put option premium rise. But this trade has a risk of minimizing profit to the quantum of exposure through option.

Stay away before the big announcements

The price movement in forex market is designed by big players against the small traders. The price of the currency pairs gets into high volatile mode close to the announcement of economic indicators of the native country of the currency. The small stop losses during the high volatile phase, usually does not work and is hit. Therefore, one must be out of the market few minutes before the announcement of such big news event.

Bottomline is to stay disciplined in trade. When fundamental analysis and technical analysis support the trade, then it is advisable to enter the trade, else stay away from the market.

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