One of the things that attracts many people to Forex trading is the potential for significant profits in a relatively small amount of time due to the use of leverage. However, with the potential for gains comes a significant potential for losses that must not be overlooked. To protect your account, it’s a good idea to look at the bigger picture, which means not just eying the potential profits, but looking for ways to trade in a way that has lower risk. Your rewards may be lower in the short term, but with a low risk Forex trading strategy you will hopefully see more success in the long term.
There is always risk – and that’s ok
Think of it this way: there is no business that you can get into that doesn’t have a certain amount of risk. For example, if you decided to open up a convenience store, there is also the possibility that you could not make enough money to keep the doors open. However, if you do the right research and make the right business decisions, you increase your likelihood of building a successful business. In this sense, your trading business is very similar. You must do proper market research in order to make solid trading decisions. You’ll still have some risk when you trade, but the risk will be reduced by your own understanding of the markets and how they move.
You have (some) control
One great thing about trading Forex is that you can be in or out of the market at your own time of choosing. For example, if the markets are very erratic and too volatile for you to be comfortable, you simply don’t trade. Unfortunately, most new Forex traders don’t understand that it’s ok to step aside when necessary. But if you want to manage your risk, don’t be afraid to sit out. You may miss some winning trades, but you’ll likely skip the losing trades as well.
Another important way to control your trading account and trade with lower risk is to properly manage your position size. While Forex traders can use leverage to increase their gains on winning trades, leverage can also cause excessive losses, and should be used carefully. Don’t let your desire for a quick buck lead you to overleverage your account. You are in control and should always take care to trade responsibly.
Finally, you can control your position size and time your trades to have lower risk. For example, if you work full time and don’t have much time to trade, you can cut your position size and trade from the daily time frames. It only takes a few minutes a day to look for set ups and set stop losses and this type of trading strategy will allow you to go on about your normal life while your money works for you. If you do have time to sit at the computer for hours on end, then short-term trading can be a possibility as well.
Pay attention to trading psychology
Psychology is probably the most underrated tool that a Forex trader has. The longer that I trade, the more I realize this is true. For example, a market will either go up or down over the longer-term. That being the case, in theory you would have roughly 50% likelihood of success on any particular trade. What do you do with these odds? Let’s take an example: you decide to short the USD/CHF pair. As you press the sell button, the market turns around and goes higher almost immediately. You have a 50 pips stop loss that is in danger of being hit rather quickly. Do you allow it to happen? Or do you move your stop loss even higher with hopes of the market turning back in your favor? Unfortunately, far too many traders will do the latter. You must remember that you set your stop loss for a reason, and the reason remains no matter how the market moves.
But the worst part is that the biggest mistakes often come right after the initial loss. Quite often far too many people are looking to “get their money back” from the market. They not only will reverse the trade but will double the size in order to make that money back quickly. Murphy’s Law dictates almost 100% of the time that the trade won’t work out. You have increased your losses instead of minimizing them.
Risk management is crucial and the key
Risk management is by far the number one job of traders. You need to understand that losses are part of the game, and you have to be able to tolerate them. For example, if you have a loss like the one described above and risk 10% of your account, you need to make a 11% just to break even on the next trade. You also have taken a significant amount of damage to your account. However, think about the trade in the terms of risking 1%. You still have 99% of your starting capital, which is much easier to stomach. In fact, I know many traders that will risk only 0.5% per trade.
It’s not about the trade set up
There’s no magical trade setup that will create high-profit, low-risk trades. The reality is that your trading system isn’t the only thing that’ll dictate your success. You also need to manage your risk, pay attention to psychological triggers and keep on top of the market, even with a trading plan in place. The best way to maintain low risk in your Forex trading is to keep your leverage reasonable, stay focused on your goals and to not let stress or greed dictate your trading decisions. With these golden keys, your low risk strategy should bring solid results over a long trading career.