It’s easy to underestimate the size of the forex market, with this massive global entity currently worth an estimated $1.934 quadrillion. This is a staggering amount, and one that’s 2.5-times larger than the global GDP.
As you can imagine, this is indicative of a popular and attractive marketplace, and one that boasts the type of leverage that enables traders to potentially earn considerably more than their initial deposit amount.
Conversely, it’s also possible to lose more than your initial deposit amount, so it’s crucial that you strive to manage risk and minimise this as much as possible. Here are some ideas to help you achieve this.
1) Educate Yourself and Identify the Key Forex Risks
Let’s start with the basics; as the best strategy for managing forex trading risk revolves around the deployment of theoretical knowledge and practical experience.
This can help you to develop a broad and insightful knowledge base, and one that’s underpinned by a keen sense of determinism which helps you to understand the underlying laws that govern changes in the marketplace.
This definitely lends itself to more confident and informed decision making, which is free from emotional influences and focused solely on a detailed analysis of historic and real-time trends.
We recognise that this process can take a significant period of time, but it also delivers rewards when it comes to banking sustainable and sizable profits.
2) Don’t Risk More than You Can Afford to Lose
On a fundamental level, your trading strategy has to be underpinned by a clearly defined risk profile and realistic profit expectations.
In the first instance, the former should ensure that you never commit more than you can afford to lose as part of your investment portfolio. Of course, achieving this objective is helped by the margin-based nature of forex trading, but you must only ever risk an amount of capital on the understanding that you could potentially lose all of it.
Clearly, you’ll need to manage your profit expectations in line with your appetite for risk and the precise amount of capital that you have to invest.
Otherwise, you may set a profit target that’s far in excess of your budget, causing you to lose more than you can afford in the pursuit of ever increasing profits.
3) Use Stop Losses on Your Trading Account
From a practical perspective, it’s also important to deploy viable risk management measures to cap losses and safeguard your capital at all times.
The good news is that a number of such tools will be available through your forex trading platform, with stop losses offering a relevant case in point.
For example, these entities enable you to automatically close trading positions once they’ve incurred a predetermined level of loss, enabling you to constantly minimise losses and cope with the innate volatility of the forex market.
You should practice using these as part of your demo account, which enables you to access a simulated market environment and hone your skills before risking your hard-earned cash.