How professional investors manage risks in Forex trading: 5 powerful steps

Forex trading might pose significant risks to traders that do not implement risk management techniques in their strategies. Apart from those techniques, there are several personal financial security rules you should follow to minimise your risk exposure. Below are the most powerful ways to mitigate any negative impact Forex orders might have on your capital.

1.      Start with a demo account

The first thing you might want to consider when beginning your trading journey is practising your skills on a demo account. That way, you’ll be able to put your strategy to the test and identify its weak points to correct them.

OctaFX’s demo accounts recreate the real market conditions for traders to have a feel of what it’s like to trade in the fast-paced financial environment. The main difference between demo and live accounts is that the funds on a demo account are simulated, meaning that you don’t trade with real money and therefore face zero risks.

2.      Ensure the security of your funds

The ability to withdraw your money from the trading account fast is one of the most important indicators of a broker’s trustworthiness. Since all trading starts with a deposit and ends with a withdrawal of funds, you should be confident that there won’t be any problems with either.

3.      Diversify your portfolio

Diversification is key to all profitable investments. Your Forex portfolio can also be diversified—using currency pairs that are correlated with each other in different ways. Correlation refers to the tendency of two currency pairs to move in the same direction. For example, EURUSD and GBPUSD are positively correlated—they tend to move in one direction. In contrast, EURUSD and USDCHF are negatively correlated, counteracting the moves of each other. While investing primarily in positively correlated pairs might expose your portfolio to greater risk, the pairs that are either negatively correlated or not correlated at all will decrease the risk exposure and balance out the portfolio.

4.      Use stop orders and limit orders

The Forex market is famous for its volatility—with asset prices rising and falling significantly during the day, traders face more risks of losses. Due to this fact, it’s important to identify entry and exit points for your trades in advance. Stop Loss and Take Profit orders will solidify those points in the chart, cutting your potential losses in advance and helping you resist the temptation to leave the order open when the profit target has been reached.

5.      Manage your risk per trade

You should not risk a large portion of your capital per order at any time. Doing so might not show after one or two losing trades, but should there be a streak of them, your whole capital could be wiped out. A good rule of thumb here is not to spend more than 1% of your capital per order while keeping your loss-per-trade at a maximum of 25% and to quit it once it gets there.

Following the above steps will not eliminate all possible risks. However, it will help to greatly reduce your risk exposure and keep your losses under control. To make Forex trading work for you, develop a strategy that implements the methods described in this article and uses an analytical approach in identifying entry and exit points for your orders. That way, you’ll maximise the profit potential of your trading in the foreign exchange market.