Forex Risk Reduction Techniques
There is no doubt about the fact that Forex trading can be very risky. Yet, it can also be super profitable, if done the right way.
As a newbie, you may be worried about risking too much on the market. However, with the right Forex risk reduction techniques in your arsenal, you can make your journey much safer.
Today we are here to talk about some of the best Forex risk reduction techniques out there. These are tips and tricks designed to help you minimize risk while increasing overall productivity.
Best Forex Risk Reduction Techniques
Let’s take a look at some of the best ways in which you can reduce and manage the risk associated with Forex trading. If you follow the tips as outlined below, you should be able to minimize the risk of losing money while maximizing your profits.
Stop Loss & Take Profit Levels
One of the best Forex risk reduction techniques out there is to stay on top of your stop loss and take profit levels. Finding the adequate SL and TP levels are an essential part of any trade setup.
The problem here is that many newbies set these levels arbitrarily without putting much thought into it. You need to learn how to choose the proper stop loss and take profit levels for your trade setup, for the type of trading you are doing, and yes, for how much money you can afford to lose in the worst case scenario.
If you are simply guessing what your stop loss and take profit limits are, for any given trade, this means that things are already out of control. A good stop loss level will prevent you from bleeding money if a trade goes south. A good take profit level will allow you to bank profits before things turn around.
Stay Away from Leverage
One of the most dangerous things that a newbie FX trader can do is to place trades with huge leverage levels applied to them. Sure, leverage is a great thing if you only have a bit of money, but want to place huge trades. However, leveraging positions is something that only professionals and experienced traders should do.
For those of you who don’t know, if you have a trade with a leverage ration of 10:1, it means that you control 10 times more money than you actually have. In other words, with 10:1 leverage, you could only have $100, but you can open trades worth $1,000. If things go your way, then you can make a killing. You only had to invest $100 for a $1,000 trade.
However, if things go south, beware that you are on the hook for the full leverage amount, the full $1,000. Therefore, one of the best Forex risk reduction techniques out there, particularly for newbies, is to stay away from leveraging trades, or at least don’t leverage them by too much. Leveraging is a high risk high reward kind of thing.
Avoid Big News & Economic Announcements
Yet another one of the best Forex risk reduction techniques out there is to avoid trading during times when there are big economic announcements on the horizon. Yes, there are economic announcements on a daily basis, often many of them, so you cannot avoid all of them. However, big economic announcements are definitely a cause for caution.
Announcements, particularly those made by central banks regarding interest rates, inflation figures, job reports, and consumer spending data can have massive impacts on markets.
Seeing as this makes for very volatile and unpredictable FX trading, these big economic announcements are best to steer clear of. If you do happen to have open positions when big economic news hits, hedging is something that can help soften the blow. If necessary, you can also consider closing trades.
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Forex Risk Reduction – Try Avoiding Smaller Timeframes
As a Forex risk reduction technique, it may seem reasonable to open trades using small timeframes, but this is actually not so. If you are looking to mitigate as much risk as humanly possible, trading longer timeframes is highly recommended.
The reason for this is because trading shorter timeframes is often much less profitable, less predictable, and way more stressful than trading longer timeframes.
Simply put, with lots of short trades open, it can be really hard to keep track of things. Keep in mind that if you trade at a higher frequency, you will also incur higher trading fees, something we all like to avoid. Moreover, the longer timeframes are much easier to plan for and far more predictable too.
Look for A Reason to Not Trade
A good Forex risk reduction technique to adhere to is to try and look for a reason not to execute trades. The fact of the matter is charts are always saying that there is a good buy or sell position possible, and brokers always want you to trade. However, keep in mind that brokers don’t care if you win or lose, just as long as you are trading.
Folks, just because there is money sitting in your account does not mean that you absolutely have to execute positions. Popular knowledge dictates that money burns holes in pants when it is not being used, but of course, this is totally false.
Sure, if there is a viable position that you can open, one that will produce profits with relative certainty, then sure, go for it. However, you should always be asking yourself “what if”. In other words, to reduce your risk of losing money, you need to actively look for reasons not to trade. Overtrading is closely correlated with underperformance, so this is best avoided.
Best Forex Risk Reduction Techniques – Final Thoughts
Above we have touched on some of the best Forex risk reduction techniques out there, but there is still so much more to learn. For all of you who want to become true FX trading pros and learn about even more Forex risk reduction methods, we would recommend taking a look at the Income Mentor Box Day Trading Academy.
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