Many novice traders are skeptical that it is not easy to lose money. Or how to reduce the risk of trading? forex trading. This is a very interesting topic to discuss. Because traders want to minimize their potential losses as much as possible. But they also want to get the most profit in every transaction. in fact There is a saying that “High risk, high profit (high risk) greater profit potential)” in any forex trading and investment activity.
Novice traders are always looking for answers to these questions in the wrong place. They may be looking for a time frame chart that is not easy to lose. Or which technical indicators are the most accurate? In fact, the way to reduce risk in Forex trading does not involve choosing the timeframes or technical indicators that traders use. In order to minimize risk and not make easy losses, traders should explore the topic of risk management (risk management).
in general Beginners will take a long time to learn this topic. because they were not aware of the various wrong decisions Happening when just starting forex trading Beginners tend to understand the importance of being understood. risk managementAfter realizing that you can’t earn huge profits as easily as clicking a PC keyboard. However, don’t worry as this article will review 5 (five) ways to reduce your risk in Forex trading that are effective and practical. easy job for everyone
- Prepare funds that can be sacrificed
There is one serious mistake that almost all novice traders make. that error is Use capital that cannot be sacrificed. It may be that employees use half of their income as capital. or housewives use monthly money as capital or students use the tuition fees of the following semester They do it because they think they will be profitable in no time. It’s not that easy
After starting forex trading They will feel a lot of pressure to make a profit so that the money does not disappear. Therefore, they face greater risks. Some people will feel fear of losses and fail to take advantage of the profitable opportunities that arise. Some are the opposite Feeling too greedy to make wrong trading decisions
Also read: Top 6 Tips for a Successful Forex Trading Business
The financial advisor will definitely advise you to use only “cold money” as your forex trading capital.“Evening money” refers to funds that are not needed in the near future and can be sacrificed. For example, impromptu bonuses, THR, holiday gifts, raffle prizes, travel budgets, existing funds to purchase. Concert tickets for your favorite artists, and more.
What if “cold money” is a small amount? It doesn’t matter, novice traders should not start forex with too much capital. Start with small capital first (up to 1000 USD) if you can profit with small capital. You will surely succeed when managing more capital. You will not be able to deal with larger capital.
- Know how much risk you can take
Before starting forex trading You need to know in advance how much risk you can take. how do i know Try answering the five questions below:
- How old are you? the younger you are The greater your risk. Older adults have a lower risk tolerance. due to limitations in learning and receiving information
- How do you know about Forex trading? The less knowledge you have The lower your risk, the less.
- What is your experience in the world of financial investing? People who have previously invested in other financial investments (such as stocks or ETFs) tend to have a lot of patience. The acceptable risk is definitely low.
- How much money are you ready to sacrifice? In the process of learning to trade Forex Everyone will surely suffer a loss first. Every professional trader is like that, so you first need to determine the amount you are ready to sacrifice. and then determine the capital
- What is your goal in playing forex? If your goal is short term your patience is lower meanwhile If your goals are long-term goals for the next few years Shows that you are more willing to take risks.
These five questions will help you determine the key elements. of risk management when trading, for example, regarding the amount of funds available What is the risk/reward ratio to use? and how much risk to trading positions
- Control risks when trading
basically Traders can easily manage their losses. using the following three rules:
- Always use Stop Loss (SL): Trading without SL is like driving without brakes. Also known as accidents will surely end, so you should always place your SL when the position is open. or immediately after an open position
- Set a risk/reward ratio of at least 1:2.: This risk/reward ratio is the ratio of distance between profit target (TP) and SL with 1:2 ratio. If your profit target is 60 pips then SL must be installed within 30 pips or if profit target is 100 pips shown. that SL is 50 pips away
- Risk limit is 3% per open position.: For example, if you have $500 in your account. The maximum loss per position is $15, cut losses immediately if the loss reaches $15.
The benchmarks above are just the provisions implemented by traders, but they can actually change depending on your risk appetite. No matter what your risk benchmark is. There is one thing to keep in mind: you have to be disciplined to follow the rules of risk that are judged from the start. If you often break the rules Shows that there are no rules at all.
- Limited leverage
Leverage can increase the purchasing power of your funds. For example, if you only have USD500, it is like you have USD50,000 with only 1:100 leverage. more If you use 1:1000 leverage, then USD500 can become USD500,000. That shadow makes many beginners compete for huge leverage. However, it is the wrong decision.
Traders are advised to limit leverage to a maximum of 1:100 only as using more leverage makes it easier for you to lose.. High leverage does not eliminate the possibility of losses. If the price fluctuates a lot Your capital can still be sold out in a very short time. The harder you accumulate profits, the harder it will be.
- Understanding the relationship between Forex pairs
in forex trading There are currency pairs that are related to each other. There are forex pairs that tend to move in the same direction. (positive correlation), but there are also pairs with opposite movements. (negative correlation) so you need to remember these two rules:
- Do not open the same position in two negatively correlated pairs at the same time.: It is important to note that EUR/USD and USD/CHF have a negative correlation. Therefore, these pairs cancel each other’s profits. If you buy EUR/USD and buy USD/CHF at the same time, there will be only one profitable trading position in the end.
- Pay attention to commodity prices when trading AUD, NZD and CAD currencies.: AUD is positively correlated with gold price and NZD iron ore was positively correlated with wool and dairy prices. CAD was positively correlated with oil prices. If the commodity price goes up These three currencies will appreciate. These three currencies are likely to depreciate.
In addition to these two relationships, there are many other forex pairs that are connected to each other. But it only happens during certain times. For example, EUR/USD and GBP/USD sometimes correlate positively. Likewise, USD/JPY and AUD/USD can always be positively correlated.
while still learn forex tradingIt’s a good idea to trade one pair first. If you specialize in one pair then add others. Thus, you will truly understand the nature of the pair being traded and be able to avoid serious losses.