How to Minimize Forex Trading Risk

Risk is the uninvited guest of any trade. Certainly, we are not at the level of betting (Forex trading is not and will never be gambling), but it is still speculative trading. The very concept of speculation brings into play dynamics that have to do with the logic of danger. It is essential for any trader, whether expert or not, to control risk. It cannot be eliminated entirely, but it can be controlled. Once controlled, if you discover that the game is not worth the candle, you withdraw. The issue is simple on paper. But what exactly does controlling risk mean? The term "risk", translated into everyday operations, coincides with loss, whether potential or real. Controlling risk therefore means controlling losses. Now, it is obvious that all traders, even the most absolute beginners, know that they must exit the trade when the air becomes unbreathable, when defeat risks turning into a rout. The difference lies in doing it "technically" rather than "emotionally". In the first case, you react instinctively, without the comfort of numbers, and usually get the timing wrong. In the second case, you use rationality, simply exiting when certain conditions are met. Conditions, let's be clear, decided beforehand, with a cool head and with the support of numbers. In concrete terms, what does all this mean? Essentially two things. One, keep an eye on the ratio between potential gain and potential loss. If the ratio is 1 to 1, that is, you risk losing 100 euros and can gain the same amount, you are not making a great deal. The best ratio is 3 to 1. 2 to 1 is already less convenient and the game may not be worth the candle. The important thing is to know it beforehand. In a sense, it is knowing what death you will die if things go wrong. This phrase, apparently as tragic as it is unrelated to the world of trading, perfectly summarizes the spirit of money management. Two, don't bite off more than you can chew. Popular wisdom comes to the aid of the trader. It is necessary to "set the risk" based on the size of your account. When the potential loss exceeds 2 or 3% of your account, it is best to exit. Regardless of the feelings the trader experiences, the instinct that says yes, the market will soon turn for the better and the trade will be a winner. It is an iron rule that compensates for the typical loss of clarity that involves traders in the race.