Forex Risk Management: Basic Rules and Recommendations

Besides technical analysis that allows avoiding the bull tap, risk management, according to experienced traders, is essential to a successful trading career. Whatever length of time your transaction lasts, it must adhere to certain unbreakable criteria.

But what is risk management’s true worth? What are the essential guidelines that every trader should follow in order to avoid annoyances? This article contains the answers to these and other questions.

Uncertainty reduction

You can ensure that a bad consequence will not surpass a predetermined amount if you keep your risks under rigorous daily management. Forex traders, for example, rarely set the daily risk bar higher than 1-5 per cent.

A trader with 20 to 100 trading sessions in stock has a good chance of catching a successful trend. After making a “golden” trade, a trader frequently makes another “golden” trade.

Increased Efficiency

Risk management involves keeping a record of your transactions. The more attention you pay to analyzing the results, the more opportunities you will improve your trading strategy. One can get more information from 10 quality and well-founded transactions than from 1000 emotional and baseless transactions.

This rule applies not only to entry and exit points. You have to analyze:

• Position size
• Multiplier value (leverage)
• Guidelines for determining the right time to increase a position or reduce its volume.

The amount of a trade’s opening fee or spread can also be factored in if scalping is preferred.

This info will help you improve the entire trading system, which, in turn, will influence the financial results. Also, you will learn how to plan your trades. The trading journal will help you develop the habit of analyzing and documenting.

Don’t trade highly correlated assets.

This rule advocates the need to avoid assets whose prices copy the dynamics of others. If you are a seasoned trader, you may not observe it. Yet, novice investors sometimes don’t even realize that they end up buying the same asset while trying to diversify their portfolios.

For example, a trading strategy signals to sell EUR/USD, EUR/JPY and buy EUR/CAD. These transactions have different directions, but they all imply a strengthening of the euro. Such a portfolio increases the risk of negative experiences from applying a trading strategy.

Remember: you must open trade to test a trading signal. If the USD looks strong, it’s not worth buying against all other currencies.

Move Stop Loss in the Right Direction

Only move the Stop Loss towards risk reduction. It is strongly recommended not to increase the loss limit. Such actions are usually related to human emotions rather than risk management rules or trading strategies.

However, moving Stop Loss to the break-even zone is your first step towards successful trading. Experienced traders often use a Trailing Stop Loss. It automatically follows the current market quotes.

With MetaTrader 4 trading software, you can set the distance between the Trailing Stop Loss and the quote. Each time the price breaks above this range, the order gets closer to the market price. The risk management rule eliminates the possibility of an initially profitable position turning into a losing position due to poor trader performance.

Limit your attempts to follow a trading signal

You cannot open positions one after another at random. You need to use special tools to assess the situation. For example, you receive a trading signal and make a losing trade in 15 minutes. It is better to check the signal for a longer period of 30 minutes or 1 hour before opening another trading position. If the strategy signals contradict each other, the best solution would be to hold back from opening positions on this asset.