Currency Trading: How to Manage Your Risk

01/08/2015 9:00 am EST

Focus: FOREX

The beauty and the tragedy of forex is that profit is as easy to lose as it is to make, so Robert Turp, of FXPro, outlines several methods for minimizing risk and removing emotion from the trading equation in order to reduce the role of the trader down to a stone cold mathematician.

Irrespective of whether you’re a professional trader or an amateur who’s just dipping your toes in the shallows, there are always ways to improve your trading strategy. These methods are manifold, and different approaches will have varying levels of success for different people. Hints and tips can be found everywhere: on the Internet, in news articles, during seminars delivered by professionals.

One of these strategies is learning how to manage risk. The beauty and the tragedy of forex is that profit is as easy to lose as it is to make. It is no use earning a fortune on the market if you’re not going to guard yourself against losing it: success means nothing if you cannot hold onto it. Thus, understanding how to manage risk is vital to the erstwhile trader.

Of course, this sounds good in theory, but how do you actually minimize risk?

Use Limit Orders

A limit order is the sensible trader’s best friend. It works by allowing you to lock in your desired profit, instructing the system to exit your position when your target amount has been reached. Be sure to sit down and work out what this amount is before you embark, so that the strategy is in place to protect you.

Use Stop/Loss Orders

Another important tool in the trader’s armory is the stop/loss order, which gives you control over how much money you’re willing to risk losing. Such an order will work by instructing the system to exit a position when a maximum loss limit—set by you—is reached. This means that you can place a cap on how much you’re willing to lose, thus preventing financial ruin for those savvy enough to utilize them.

Make Use of the Tools at Your Disposal

A common mistake made by amateur traders is not to take full advantage of limit and stop/loss orders. For those who are willing to devote the time to formulating them, these tools can be used to place profit and loss parameters on all trades. This removes emotion from the trading equation, reducing the role of trader to stone cold mathematician. The inexperienced, however, have a tendency to watch their screens religiously, reacting to each movement in every one of their positions. They try to stretch themselves too thinly, miss critical action points and thus jeopardise their whole trading strategy. If, instead, you make use of the tools available to you, this frantic panic and unduly reactionary trading can be avoided.

Of course, trading forex will always carry a risk: that’s the beauty of it. However, this does not mean that this cannot be minimized and manipulated by those who understand the system. It’s up to you to decide whether you want to be one of them.

By Robert Turp of FxPro

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