Forex risk management is a process of using funds in the best way so that profitability and sustainability are ensured. Since forex trading involves a high level of uncertainty, using a suitable risk management strategy is a key to successful trading.
Fortunately, Olymp Trade makes the trading experience safer yet profitable, managing risks for you and preventing traders from massive losses.
However, to enrich your trading knowledge, we’ll explain how forex risk management works, provide the best management tips, and let you see again what job the platform does for you 🙂
- Top Risk Management Tip in Forex Trading
- Calculate Risk Per Trade
- Be Aware of Using Multiplier
- Use Stop Loss & Take Profit Orders
- Control Your Emotions
- Always Use a Buffer
- Final Thoughts
Interact with the underlined words and green dots to get additional details and explanations.
Explanations and definitions of terms.
The Key Forex Risk Management Tip
The first thing to understand is that trading in the financial market is not a guessing game. Instead, it is a probability game. Professional traders follow a profitable trading strategy where the main aim is to anticipate the future price of a trading instrument. However, the market may become volatile anytime due to economic uncertainty, central bank statements, news releases, or institutional trader involvement. In these cases, one might have a loss even if sticking to the trading strategy strictly.
So, the first tip to avoid high risks is trading with a broker that does it for you – Olymp Trade.
Besides, you should know how it works and how close the risks are if you neglect risk management in forex. Here are the five foreign exchange risk management tips that every trader should know.
Calculate Risk Per Trade
Many traders become excited after finding a trade setup and open positions without calculating the risk. Unfortunately, as a result, they end up trading and losing excessive amounts, leading to frustration.
Before opening a trade, traders should calculate how much risk they are taking. The ideal approach is to risk 0.5% to 2% per trade, where losing 5 consecutive trades would reduce trading balance by a maximum of 10%. In this case, one would still have 90% of their funds to recover the loss and return with positive equity.
On the other hand, the comparison between risk and rewards is also essential.
Traders should make sure to keep the risk vs. reward ratio at a minimum of 1:1.
The image above shows a Sell trade of EUR/JPY from the 143.44 level, where a minor risk is taken to achieve a higher profit.
Be Aware of Using Leverage
Leverage (we at Olymp Trade call it multiplier) is an amount the broker provides that increases the buying power. For example, if one uses 1:100 leverage, $100 trade will be $10,000 (100X100).
Using leverage allows getting the total market exposure for the deposited amount - known as margin. Using higher leverage will magnify profit, but it will magnify the loss, too. In traditional CFD trading, the higher leverage needs close attention as it may incur a huge loss at one time.
Risky, isn’t it? Fortunately, OlympTrade users are secured as they risk only from the amount invested in the actual trade, preventing high losses while still enabling high profits.
Use Stop Loss & Take Profit Orders
Stop Loss is a predetermined price level from which any trade will be closed automatically with a loss. On the other hand, the take profit order will close your trade once the price reaches the profit target on a specific level.
In financial trading, using stop loss is a must to protect the trade.
For example, if one buys EUR/USD at 1.0730 and sets the stop loss at 1.0680, the trade will be closed if the price reaches the 1.0680 level with a limited loss. In that case, if the price moves further down, it will not affect the total trade amount, only a portion.
Always Use a Buffer
The price of a currency pair fluctuates all the time, and an unexpected hit of stop loss is painful. Therefore, using a buffer from the target price level ensures profits for investors. For example, if the target for EUR/USD is 1.0900, one should use a minor buffer to set the target level at 1.0898, instead of 1.0900.
More particularly, if the stop loss level according to the given strategy is 1.2080, set it at 1.2078. Then, to take profits, one can also reduce the take profit level as a buffer.
The image above shows how the price spiked higher from the resistance level and rebounded immediately. Therefore, using a buffer at 10-20 levels would eliminate the risk of hitting the stop loss.
Control Your Emotion
Relevant for all traders with no exception. Fear and greed are common terms in financial market trading that influence traders in making poor decisions.
Therefore, controlling emotions and sticking to the trading strategy is key.
Every trader is different. Therefore, to control your emotions, you should build a trading strategy based on your understanding of the market. Find risk levels and benchmarks of entry and exit. It is better to write down these rules in front of your trading desk. It will assist you in revising the plan to ensure that you are on the right track.
Forex risk management tips discussed above will help traders manage their funds. Let’s summarize them:
Risk should be lower than the reward while the risk per trade should not exceed the 2% limit.
Do not use a higher multiplier until your success rate is satisfactory. You can easily set the multiplier from the OlympTrade platform.
Don't forget to use the stop loss and take profit tools in every trade. Setting the stop loss and take profit are easy with OlympTrade with the Auto Closing feature.
Using a buffer while setting the stop loss and take profit level is important.
If you have a couple losses in a row, don't lose hope. Take a break and return when the market conditions become stable. Also, recheck some material in the Olymp Trade Official Blog.
We hope that was helpful. The biggest take-away: always stick to the tip #1 😉Trade Safely
Risk warning: The contents of this article do not constitute investment advice, and you bear sole responsibility for your trading activity and/or trading results.