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Forex Risk Management Strategies: How And When To Walk Away

Every failure is an opportunity to improve your strategy

By Paul Ronald

Forex traders should be watchful if they want to protect their balance. Remember to limit risks associated with the job. The market is capricious, and not everything is predictable. Bad decisions can be costly. Here are a few essential tips for Forex traders in India.

1.  Stick to Your Stop Loss

Traders should not focus on profits alone. They need to protect what they have and accept only calculated risks. The risk/reward ratio is one of the most important characteristics of a trade. Consistency will help you keep drawdowns under control. Always define risk for every position, no matter how favorable the market looks.

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Where to set Stop Loss? Generally, it should be placed several pips away from your entry, or a particular percentage below the buying price. In the event of failure, you will know exactly how much you lose, so there are no surprises.

You will also protect yourself against the quick depletion of balance. A Trailing Stop Loss allows you to roll with the punches. It is a crucial element of any sound strategy.

Forex risk management
The risk/reward ratio is one of the most important characteristics of a trade.

2.  Take Profits to Protect Your Portfolio

Once you start trading, leave emotions at the door. Act mindfully, making decisions based on reason, not feelings. Humans are irrational beings: our behavior is often driven by emotions. Always have an exit plan before entering. This way, you will overcome impulses more easily.

Discipline and logic are important. Often, you may be tempted to open more trades than necessary because the market seems to be moving in your favor. Keep your eyes on the big picture, and avoid any decisions that conflict with your strategy. You may think that a few quick trades will bring a tidy profit. If your assumptions are wrong, you will only have yourself to blame.

A common misconception is using manual exit. What happens when the market does not move in line with your predictions? You may think you should stop as soon as possible. Still, manual strategies are incredibly risky.

Remember that prices always move in a zigzag fashion. Ups are followed by downs, and any trend is only fleeting. Sooner or later, the tide will change. To succeed, you need patience, consistency, and commitment to riding out the market.

A careful approach to stop loss will help you protect your funds and capitalize on different trends. This knowledge will help you get ahead in any Forex trading contest organized by ForexTime. The prize can be lavish!

3.  Are Your Trades Oversized?

No single trade should put too much of your capital at stake. A rule of thumb is to limit risk to 1-2% of your balance. The bigger your lots — the more you can potentially lose. Size is a crucial parameter that should never be neglected. This is especially important for those who trade on margin. A bad leveraged trade will wipe out your balance at once.

High Forex profits are achievable through boosted volumes or higher position sizes. Still, this is not a way to dig yourself out of the hole. If your strategy is clearly failing, take a break, and reconsider your actions. Otherwise, you will only magnify your loss.

Forex risk management
High Forex profits are achievable through boosted volumes or higher position.

4.  Choose the Right Indicators

Technical indicators are useful when you know how to interpret them. They may even help you exit before the stop loss is triggered, preserving more of your capital. Here is an example.

The on-balance volume (OBV)

This indicator will tell you if an uptrend is actually sustainable. Is there enough buying pressure to back it up? When you see the volume shift, this could mark the beginning of a reversal of an adverse price movement.

EMAs (Exponential Moving Averages)

Comparing different EMAs, you can evaluate the risk associated with your suggested position. Look out for crosses between long-term and short-term indicators — for example, the 20-day EMA and the 50-day EMA. If you are selling, and the former crosses the letter, your instrument is about to plunge deeper. You know you should convert it into cash as soon as possible.

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Selling is the riskiest when a short-term EMA crosses a longer-term EMA. For buyers, the opposite is true: when a 50-day EMA crosses over a 20-day EMA, more losses are expected.

Sometimes, Mistakes Are Inevitable

Sooner or later, every trader has losing streaks. These can be upsetting, but do not give up quickly. Every failure is an opportunity to improve your strategy. After all, the currency market is beyond your control. Sharpen your analytical skills and learn lessons. You cannot succeed without failing — at least, occasionally.

(Disclaimer: The article is sponsored, and hence promotes some commercial links.)

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