Every person that is new to forex trading thinks that making money through forex trading platforms is easy, fast, and pretty straight forward. Some will even argue with you about this after trading for about two minutes. However, for us who have some real experience with trading, we know that it takes a lot of time, dedication, patience, and commitment to get your game on. At least these are the qualities you need if you have any hope of being successful in the forex markets in the long term.
Every trade you place should be based on the experience gained from previous trades while every loss should teach you something new and form the basis for future trades. Every lesson that you learn from lost trades should help you improve on your strategy. In fact, some forex experts will tell you that you need to focus on protecting the money you already have rather than focusing on making money. The premise behind this kind of thinking is that it is only after you are able to protect what you have that you can use it to make more money. Now, in order to protect the money you have, you need a sound risk management strategy.
Only trade money you don’t need
The first risk management strategy that you need to learn about when trading forex is to only trade money that you don’t need. Simply put, trade money that you are willing to lose. Beginning traders usually don’t think that this rule is important and therefore they skip. They usually think that they won’t lose money if they trade carefully enough, but then that never works and they find themselves accumulating huge losses that they can’t live with.
You should think of trading as gambling and assume that you can win or lose money the same. Only unreasonable people carry all their fortune to a casino to gamble with the hope of making a profit. Therefore, be smart and only trade with money that you can afford to live without.
When you trade with money your livelihood depends on, you will be trading under pressure and that will affect your decision making capability.
Always use stop-loss and limit orders
Another very important risk management strategy is the use of stop-loss orders. These are the kind of losses that automatically close your trades when losses accumulated on the particular orders go beyond a given level. For instance, you could set the trade to be closed when the loss on it reaches 1% of the total amount of money stacked on the trade. This ensures that even if you lose multiple trades, you will still be able to trade because your accumulated loss will be manageable.
Think about your risk tolerance
Risk tolerance is a very important factor that every trader needs to think about. Every trader has a different level of risk tolerance. Risk tolerance often depends on factors such as age, experience, investment goals, and how much one is willing to lose to forex markets. When you determine your risk tolerance, you will sleep knowing that you have control over your trading and this way, you can make better decisions.