Forex Risk Management Tips

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Below are a series of simple tips for Forex risk management which may help in reducing potential trading losses:

Stop-losses

Trading without a stop-loss is similar to driving a car with no brake at maximum speed - it's not going to end well. Similarly, once you've set your stop-loss, you should never bring it down. There's no point having a safety net in place if you aren't going to use it properly.

Don't tie all of your investments up in one place

This is applies to all types of investment, and Forex is no exception. Forex should account for a portion of your portfolio, but not all of it. Another way you can expand is to exchange more than one money pair.

The trend is your companion

You may have made the decision to be a position trader, with plans to hold that position for an extended period of time. However, no matter which position you have ultimately decided to take, you shouldn't fight current market trends or movements. There's always going to be stronger players in the market, and the best way you can keep up with them is by accommodating such changes, and altering your strategies to reflect this.

Keep teaching yourself

The best way to learn the risk management system in Forex and become an effective Forex trader is by knowing how the market functions. However, as mentioned previously, the market is constantly changing, so if you want to stay ahead of your game you have to be willing to always learn new things and update yourself on the market's changes.

Use software programs for help

To progress in Forex you may want to utilise certain trading software that can help you settle on your choices. That being said, these systems aren't perfect, so it's best to use them as an advisory tool, and something to fall back on, rather than using them as the basis for trading decisions.

Limit the use of leverage

It can be extremely tempting to use leverage to make significant profits. However, this can make it much easier for you to lose huge amounts of capital too. So don't take on gigantic leverages. All it takes is one quick change in the market, and you could easily wipe out your entire trading account. Forex risk management is not hard to understand. The tricky part is having enough self-discipline to abide by these risk management rules when the market moves against a position.

Risk Management for Frequent Traders
If you trade frequently, one of the main ways of measuring and managing your risk exposure is by looking at the correlation of your FX trades. In stocks there is a common index known as 'beta', which shows how the stock is expected to perform depending on changes within the industry. Generally, when trading stocks and aiming to reduce risk, a trader would usually attempt to combine the stocks that would result in a compounded beta that equals zero - as some stocks have positive beta, and others have negative.

What is correlation?

There is no beta in Forex trading, but there is correlation. The correlation shows us how changes within one currency pair are reflected in the changes within another currency pair. Generally speaking, if you are trading closely correlated currencies (such as EUR/USD and AUD/JPY), you may expect them to have a common trend. In other words, whenever EUR/USD goes down, you could also expect to see a downward trend in AUD/JPY.

So how can this help to measure Forex risk exposure? We all know that risk is mainly driven by margin. This is why you should mainly trade the pairs that don't have strong positive or negative correlations, as you will simply waste your margin on the pairs that result in the same, or the opposite direction. As a rule, currency correlation is also different on various time frames. This is why you should look for an exact correlation on the time frame you are actually using.

You can manage your Forex risks much better when paying closer attention to the currency correlation, especially when it comes to Forex scalping. Whenever you are engaging a scalping strategy, you have to maximise your gains over a short period of time. This can only be achieved by not trapping your margins in the opposite-correlated assets. Managing your risk is vital if you want to succeed as a Forex trader. This is why you should adhere to the aforementioned principles of Forex risk management.
 
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