Are you in the Forex market in the hopes of becoming the next George Soros, the billionaire who predicted the collapse of the Great British Pound in 1992 and made himself a nice $1 billion in the process, or Bill Lipschutz who is said to have made $300 million in a single year trading the said market? Regardless of whom you idolize or why you’ve chosen this career path, understanding the risks in Forex trading is the key differentiator between success and failure in this business.
What are the Risks to Forex Trading?
Capital loss is the main type of risk in trading Forex or any other market for that matter. If you cannot lose the $100, $1,000, or $10,000 in your trading account without also losing the roof over your head or the car, then it’s best not to continue. You can only trade with capital that when lost will not affect your lifestyle.
Why Understand the Risks Involved
Risk is ever-present in trading. It doesn’t matter if you’ve studied a trade for 5 or 10 years or that you’ve paid a steep amount of money for the best price feeds and resources. For every trade, there is risk involved. Acknowledging the presence of risk allows you to get in and out of trades without severely harming your capital.
How to Operate in the Face of Risk
Understanding the risks in Forex trading is only half of the battle. You must also know how to operate in its presence. One common way is to place what’s known as a Stop Loss, a price point wherein the trading platform automatically closes a losing position. Setting a stop loss for every trade taken is essential as it mitigates losses.
In spite of being an advantageous tool, stop losses have received notoriety for getting triggered unfavorably during extremely volatile times. An alternative is to set a mental stop loss that when triggered will require you to manually close the position. of course, such technique requires discipline.
Another way to treat risk in the business is to refine your technical methods. Proactively work on capturing only the high-quality trades that yield maximum gains but impose minimum risks. Backtest your trading system/s using a simulator or forward-test it manually using a live account.
As a final note, one should not look at this guide as a warning to avoid Forex trading. Instead, it should be absorbed and used to trade with. For understanding the risk and accepting it wholeheartedly will make you a good and perhaps even a successful trader one day.