How to Manage Risk in Forex Trades

The foreign currency exchange market is in constant flux.  There are so many various factors which change the value of a currency – social aspects, economy, politics, environmental catastrophes, etc – that it is impossible to track them all.  However, you will have to have a strong general understanding of each of the powers in play if you want to be a successful Forex trader.

Before you begin with Forex trading, you must spend time analyzing the trends affecting currencies.  There are numerous books, online tutorials, video classes and seminars you can use to learn about Forex trends.  Even with months of analysis, you are still unlikely to be an expert.  For the many people who are eager to start Forex trading, this lack of proper knowledge can be a major pitfall – and the reason that 70% of traders will lose money while the other 30% gain large amounts.  Some of the risk management lessons in Forex trading can only occur through experience, so it is wise to use a quality Forex broker to cut back on the risk.

You will need a Forex broker in order to start Forex trading. There are a huge number of Forex brokers available on the internet – and there is a huge difference between them.  Some of the Forex brokers operate under no regulation whereas others follow strict regulatory guidelines which are designed to reduce risk.  For traders in the United States, the CFTF and NFA give information about specific Forex traders and their histories. With a quality Forex trader, you should get access to free advice, systems, or educational materials. Look for the Forex traders which offer real-time charts and pivots.

Aside from knowledge and assistance, Forex risk management also depends on keeping a sound risk profile.  As a trader, you should have set up a risk profile in advance where you decide the exact percent of the account amount you are willing to risk.  You must also determine an exact stop-loss order as well as a limit to exit order. For example, if you are dealing in the currency pair EUR/USD at the price of 1.0190, you could set your stop-loss order at 1.0150.

For traders, one of the major advantages of Forex trading is that it has such a high leverage, often going up to 1:200.  While this amount of leverage is attractive because it can greatly magnify your profits, never forget it can also magnify your losses too.  Take some time to do the math before you enter into any trade.  Calculate how much you would gain or lose on your investment at the specific leverage and your stop-loss order and limit to exit order.   Always remember that all trading – including Forex – is inherently risky.  But you can cut back on this risk by following sound habits like doing research, using a regulated broker, and seeing limits in advance.