How to Minimize Forex Trading Risks
Many of the traders are looking for ways how not to easily lose or minimize risk in forex trading. This is indeed a very interesting topic because traders want to reduce the potential loss to a minimum, but also want to get the maximum profit in each transaction. In order to minimize risk and not easily lose, traders should explore the topic of risk management (risk management). Here's how to minimize forex trading risks:
Prepare Capital That Can Be Sacrificed
There is one fatal mistake that almost all novice traders make. The mistake was to use capital that could not be sacrificed. It may be that an employee uses half of his monthly income as capital, or a housewife uses the monthly spending money as capital, or a student uses the next semester's tuition fees. Traders do it because they imagine they will make a profit in a short time. Yet the reality is not that easy.
After starting forex trading, traders will feel tremendous pressure to profit so that money is not lost, so they face even greater risks. Some of them will feel afraid of losing and fail to take advantage of the profit opportunities that arise. Others are just the opposite, feeling greedy to the point of making too many wrong trading decisions.
Financial advisors will definitely advise traders to use "cold money" only as forex trading capital. "Cold money" is meant funds that are not needed in the near future and can be sacrificed. For example, impromptu bonus money, THR, holiday gifts, raffle prizes, travel budget, funds originally intended to buy concert tickets for favorite artists, and the like.
What if the "cold money" is a small amount? It does not matter. Beginner traders are advised not to start forex with too large a capital. Start with a small capital first (maximum USD1000). If you have succeeded in making a profit with a small capital, then the trader will definitely succeed when managing a larger capital. However, if only a small capital loses, then the trader may not be able to handle larger capital.
Know How Much Trader's Risk Tolerance Is
Before starting forex trading, traders must know in advance how much risk tolerance they can bear.
Control Risk When Trading
Basically, traders can manage not to lose easily by implementing the following three rules:
Always apply Stop Loss (SL): Trading without SL is like riding a car without brakes, aka it will definitely end in an accident. So, traders should always remember to place SL when opening a position, or immediately after opening a position.
Determine a risk/reward ratio of at least 1:2: This risk/reward ratio is the ratio of the distance between the target profit (TP) and SL. With a 1:2 ratio, if the trader's profit target is 60 pips, then the SL must be installed within 30 pips. Or if the profit target is 100 pips, then the SL is 50 pips away.
Limit risk to 3% per open position: For example if the trader has a capital of USD500 in the account, the maximum loss per position is USD15. Immediately cut loss if the loss has reached USD15.
The benchmarks above are only provisions that are generally carried out by traders, but actually the standards may be changed depending on the trader's risk tolerance. Regardless of the trader's risk benchmark, there is one thing that must be remembered: the trader must be disciplined in carrying out the risk rules that have been decided from the start. If traders often break the rules, then it means that there are no rules at all.
Limit Leverage Use
Leverage can increase the purchasing power of a trader's capital. For example, a trader only has a capital of USD500, it is as if he has a capital of USD50,000 using only 1:100 leverage. Even more fantastic, if you use 1:1000 leverage, then USD500 can turn out to be USD500,000. That shadow makes many beginners race to use massive leverage. However, it was the wrong decision.
Traders should limit leverage to a maximum of 1:100 only, because the use of greater leverage can make it easier for traders to lose. High leverage does not eliminate the possibility of loss. If there is a very large price fluctuation, the trader's capital can still be sold out in a short time. On the other hand, the greater the leverage, the more difficult it will be for traders to collect profits.
Understand the Correlation Between Forex Pairs
In forex trading, there are pairs whose movements are related to each other. There are forex pairs that tend to move in the same direction (positive correlation), but there are also pairs whose movements are opposite (negative correlation). For that, traders should keep these two rules in mind:
- Do not open the same position on two negatively correlated pairs at the same time: It is important to know that EUR/USD and USD/CHF have a negative correlation. So these pairs cancel each other's profit. If you buy EUR/USD and buy USD/CHF at the same time, then in the end there will only be one trading position that makes a profit.
- Pay attention to commodity prices when trading the AUD, NZD and CAD currencies: The AUD is positively correlated with the prices of gold and iron ore. NZD is positively correlated with wool and dairy prices. CAD is positively correlated with oil prices. If commodity prices rise, these three currencies will strengthen. However, if commodity prices decline, these three currencies tend to weaken.
In addition to these two correlations, there are several other forex pairs that are interconnected. However, this forex pair correlation does not take place all the time, but only at certain times. For example EUR/USD and GBP/USD are sometimes positively correlated. Likewise, USD/JPY and AUD/USD can experience a positive correlation at any time.
While still learning forex trading, it's a good idea for traders to trade one pair first. If you are proficient in one pair, then add other pairs. Thus, the trader will really understand the characteristics of the pair being traded and can avoid fatal losses.
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