Forex is a risky business indeed. Any unpredictable price movement, any wrongly set transaction can affect a trader’s results. Still, consistent professionals use correct risk management to measure their losses and get profit. Some people even say that risk management can help you to enter a new level on the Forex market and be more successful.
JustForex team is here to help all newbies understand how to deal with possible risks that are inevitable on Forex.
So, what are the risks on Forex?
- Leverage risk.
Many newbies open over-leveraged positions with small deposits and get margin calls very soon. Note, that professionals advise to open positions that don’t exceed 10 times of your total account value. In fact, the main secret of measuring this risk is limiting your leverage and using correct lot sizes.
Don’t forget about the 2% rule. Risk with no more than 2% of your capital. Just imagine that with this level of risk you can face 50 losses in a row while trading. If you risk level is 20% for an order, you’ll be able to open only 5 orders with negative result, but it is more likely that you’ll face a margin call after the fourth loss.
As you see, it’s no matter what leverage you use if your position fits that percentage. Math is the best helper here.
- Price risk.
The Forex market is volatile and the so called ‘black swans’ can take place on it. They are unexpected events that influence the quotes greatly and make the prices move unpredictably. The spread can also widen during some non-volatile periods or important events, so be careful and watch the prices attentively. Moreover, your trading system may contain a plan for such events. You should know exactly what to do in such situations in order not to face losses. Setting stop loss orders is an ideal option to insure your trading funds from them.
Unpredictable and sharp price movements may sometimes lead to stop out. Usually, stop out happens when an account falls below a half of the initial margin. Still, you can deal with it. Try not to open multiple transactions on a volatile market and don’t use too high leverage, as we have written above.
- Risk of being scammed.
Every experienced trader had to search for a broker at the beginning of the career. They know how hard this stage is and how easily people can be scammed by dishonest brokers. Thus, the research step has paramount importance for all newbies. Look at the company’s history, its regulators and liquidity providers, as well as peoples’ reviews before choosing an exact broker. Make sure that it is reliable. For example, JustForex has all this information in a free access as we want to prove that we are honest with our clients.
- Emotional risks.
Once you shift from a demo account to a live one, you have to manage strong emotions such as fear, greed, hope. Being trapped in volatile positions is a great Forex risk. Waiting too long to exit a losing position with hope for a reversal won’t lead you to success. A trader should quickly identify his mistake and let small losses go before losing more money. A detailed trading plan can be a helper here. You should make a certain algorithm of finding the entry and exit points. Open/close transactions when you notice them, but not when your emotions tell you to do that.
The bottom line
As you see, traders can’t fully get rid of risks on Forex, but they can measure them in order to get more profit and face less losses.
Track your overall exposure, control your losses, keep an eye on the market events. Try to keep calm and logical even during unpredictable situations. Use math, but not emotions. And you’ll notice that risk management really works!
We wish you profitable trading!