Risk management methods
Risk is a part of forex trading; you want to make profits, but you could also lose money. The important thing is to manage your risk and prevent catastrophic losses. There are a number of ways to do this.
Open a Cent Account and try out these methods. You can make forex trades for as little as two cents, so it’s an excellent way of learning.
There are four main ways of limiting your losses:
- Placing stop orders
- Managing your money – only invest part of your funds
- Following market trends
- Sticking to your strategy – don’t let your emotions take control
Once you have opened a position, stop orders are the best way to limit your risk. A stop order is an order to sell automatically when the market reaches a specific price.
There are several types of stop order, each of which provides different benefits.
Initial stop signalBefore you open a position, establish how much you’re willing to lose. Determine the corresponding price and set an initial stop signal at this level. If the price drops to this level, your position will be closed automatically, limiting your loss.
Take profitSimilarly, you should determine how much profit you want before you make a trade. Determine the price, and set a profit stop at this level. Once the market reaches this price, we will close your position and lock in your profit.
Trailing StopIf you think there’s a trend developing, use a trailing stop to follow it. The stop is set initially at a fixed distance from the current price. As the price improves, the stop follows it. However, if the price deteriorates, the stop doesn’t move. Here’s an example:
- The US dollar to euro exchange rate is .7040
- You spend $1,000 and get €704
- You set a trailing stop of .0050 points
- This means that your position will be closed if the rate reaches .0790
- If it did, you would get back $992.95 – a loss of $7.05
- The rate actually goes to .6990 – the trailing stop is adjusted to .7040
- The rate then goes to .7020 – the trailing stop stays at .7040
- The rate changes again to .6950 – the trailing stop is adjusted to .7000
- Finally, the rate changes to .7000 – your position is closed automatically
- You get $1005.71 – a profit of $5.71