3 Ways to Limit Risk in Forex Trading
February 17, 2017
Risk is a fundamental component in Forex trading. It's practically impossible to eliminate it, after all, it's speculative trading. However, it is possible to limit and control it. There are three simple and reliable techniques to do so. No great analytical skills or competencies are necessary, just determination and a pinch of discipline.
Verify the Risk-Reward Ratio
In theory, the best ratio is 1 to 3. The reward, i.e., the potential gain, must be equal to three times the risk, which is the potential loss. This doesn't mean approaching the Take Profit in a radical and crude manner, but rather drafting a strategy, or better said, a trading system, that is capable of producing a 1 to 3 ratio. The result is guaranteed because, thanks to a ratio of this magnitude, it is possible to fail more trades. It's a way, therefore, to absorb the danger of losing. The risk, precisely.
Adjust the Potential Loss to the Account Size
This is a fundamental step. This rule simply suggests not biting off more than you can chew. It's a measure of common sense, which applies in Forex trading as in life. As a general rule, it is thought that the potential loss for each trade should not exceed 2% of the account. This is, of course, an arbitrary percentage. It all depends on your risk propensity. Even 3% or 4% could work. The important thing is to have this parameter clear in mind and control it based on your goals.
Limit Volumes When the Market is Volatile
We're always in the field of money management, although the scope of this move is broader. In a nutshell, a lower profile is recommended when the market is volatile, dominated by uncertainty, or worse, by panic. The only problem is managing to act in time. Very often, in fact, the market changes face suddenly and there isn't the necessary space to switch to a lower profile. However, in some more restricted cases, it is easy to predict the beginning and end of periods of volatility. This is where fundamental analysis comes into play, allowing a broad and in-depth view of the external factors that can cause a shock in the market.
As you can see, limiting risk in Forex trading is relatively easy. These rules can be modified to your liking, at least in numbers, in order to adapt them to your trading style or your goals, ambitious or less so.
