Forex trading is not only popular among serious investors and big players, but also among retail traders and those who are looking for smarter ways to invest their money. While bigger traders are capitalising on the forex market, the majority of traders on the market are actually small, personal traders.
Getting started with forex trading also gets easier now that there are more online brokers and trading platforms to use. However, the low entry barrier doesn’t mean you can take forex trading lightly. It is still necessary to understand how to best protect your investment and trade responsibly. There are several tips you want to use to manage your risks when trading forex pairs.
Work with a Good Trader
The process of keeping your forex trading experience safe begins with choosing a good online broker to work with. While forex is a highly regulated financial market, there are still brokers with shady practices and bad reputations for investor security. Taking extra steps to make sure that you are using a reputable and reliable broker is a must.
You now have multiple reviews to rely on, along with opinions of experts, certifications and licenses, and other measures to determine if a broker is worth pursuing. The more you look into the best broker, the more you will find good things about the services.
Choosing a broker is also about choosing a trading platform. Some platforms like MetaTrader are available across multiple brokers. That said, some brokers also use their own proprietary trading platform and console, so make sure you are comfortable with the platform before deciding to sign up for an account.
Mind the Leverage
Leverage is another reason why forex trading is so popular. At one point, you can find brokers that offer 10,000:1 leverage, giving you a chance to invest £100 and trade £1,000,000 worth of forex pairs. If you do that, however, you are risking almost 100% of your margin on a single trade; we will get to this risk in a little bit.
That 10,000:1 leverage is too big even for expert traders. While leverage is great for boosting your ability to earn profit, it also increases your risks by a substantial margin. Setting your leverage too high will only expose you to more of those trading risks.
Since last year, the European Securities Markets Authority, or ESMA, limits the leverage for retail traders to 30:1. The limit for business trade accounts or larger traders is extended to 500:1 in some cases. The small leverage is there to protect the customers rather than to limit your ability to make money from the forex market. The best forex brokers not affected by ESMA are also the ones you want to use, so ensure you do some research into the different brokers available and choose the one which most suits your requirements.
Know Your Limits
The margin you have – the money you deposited into your forex trading account – is also a good measure of risk management. Ideally, you don’t want to risk more than 2% of your margin on a single trade. If you have £100 in your account, the maximum you can risk is £2.
Based on the risk-return trade-off principle, this means that your target return should also hover around the £2 mark for every trade. You can let the open position remain open when the market is moving in the right direction, but you must always cut your losses when the risk is greater than what you can afford to manage.
Rather than making big trades to maximise your profits, it is actually better to make smaller trades that produce consistent results. When you are well within your trading limits, you have more options to use when the market moves against you. That brings us to our last tip, which is….
Trade with a Plan
Always enter a position with a clear plan in mind. How much are you investing in the pair? What is the basis of opening the position? What’s your target profit? More importantly, how far down are you prepared to go before you decide to cut your losses?
Forex trading platforms come with features that let you limit your risks. There is a Stop Loss limit you can set when opening a position. The position will be automatically closed when that limit is crossed. If the trading platform stays active, you can also set a trailing stop; the Stop Loss limit is automatically moved when the market moves further towards your goals.
Knowing what to do in the event of a market turn is also important. With enough margin, you can hedge your previous positions by opening an opposite position of the same amount when the market goes too far against you. Your loss is preserved at a certain level and you can choose to close the hedging position once the market moves towards the target profit again.
Trading responsibly is how you really capitalise on market opportunities. The forex market will only be more exciting, so explore the opportunities today and be a responsible trader from the start.