How to Manage the Risks of Trading Currency

Filed under Forex Strategies

If traders want to succeed in the forex market they must learn how to manage the risks of trading.

Lets take a look at some tips on how to manage the risk of trading currency.

1. Start with one currency pair
Many forex beginners will want to trade several currency pairs at the same time. It’s not a particularly good idea to manage the risk of trading currency. For example, if you long EURUSD and short USDJPY at the same time, you will be exposed into the risk of the US dollar twice. Overall, it’s like you are trading the US dollar twice while the euro dollar and yen once in your portfolio, let alone the correlation between the currency pairs. For beginners, opening too many trades will not help manage the risk of trading forex.

2. Use the mini lot or micro lot
Using the mini lot or micro lot is the effective way to make profit by trading currency. When you trade via the forex account, the standard unit you use is worth 100,000 dollars, known as one standard lot. One mini lot is only 1/10thof the size of the standard lot while the micro lot is 1/100th in size. By using the standard lot, I pip loss will cost you 10 dollars. However, the same 1 pip loss by using the mini and micro lot via trading forex is only 1 dollar and 0.1 dollar respectively.

3. Keep everything under control
The more controlled your risk is, the more flexible you can be when you need to be. Trading forex is about opportunities. Traders have to be able to act on the opportunities when they arise. Trading currency well means you can continue to trade when things do not go the way as you planned. Managing the risk of trading forex is certainly the boring part compared to executing the trades. However, that’s what guarantees a trader’s position in the forex market.

4: Cut losses
Every trader loses when trading currency from time to time. The key to manage the risk of trading currency is to know when to cut the losses. At some time, you have to manually put a stop to your losing trade. For example, you may have a mandatory loss control of 5%, whenever the trade loses 5% of the original value, you will exit the trade even if you lose money. Don’t get greedy and hope for the dramatic drawback. You may find yourself lose even more.