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Forex Risk Management Strategies

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Forex is set up to be a rather risky endeavor. I always encourage new traders to go easy on the risk as they get started. The system is somewhat rigged to encourage risky behavior, so you have to set out with a plan to protect yourself.

First Things First

The number one thing that you can do to manage your forex risk is to never trade money that you can't afford to lose. Sometimes people skip this one thinking "that won't happen to me", but it really will affect your trading performance. If you are trading money you can't afford to lose, and you lose significantly, or even face the threat of losing significantly, your decision making will be compromised and mistakes will happen.

See: Why do Forex Traders Lose Money?

Second Thing

The second important thing is that you need to not let your eyes be too big for your stomach. If you don't know what that means, it means start small. Make your trade sizes appropriate for your account balance. US Brokers offer traders the ability to make trades at 50:1, but that doesn't necessarily mean you need to be thinking that big. Trade what you are safely able to trade. This means you shouldn't be opening $100,000 trades with a $2000 account. There is no need to make huge percentages every day on your money. It's more important to make continuous percentages rather than large ones.

See: Choosing a Lot Size

Third Thing

Use stop losses correctly. A stop loss is a type of order that does exactly what it says, it stops you from losing any further money from your account. Trades don't always go the way you expect, you need a parachute to cut your losses. The trick is to set your stop in a spot that you know the trade will reach if you are totally wrong with your trading idea.

See: Stop Loss Basics

Expanding on Using Stop Losses

Stop losses should be considered to be your emergency exit. They should be set to execute when your trade has gone horribly, horribly, wrong. I've seen many traders place their stops at a price where they might be wrong, or even worse, could possibly be wrong. If you set your stop too close to your price, it's going to get hit, it's Murphy's law.

Putting it all Together

Trading with money that you can afford to lose in worst case scenario, trading with reasonable lot size, and controlling your risk with stops will prevent you from having a major trading disaster. These steps won't prevent you from losing money, they will just give you a chance that you will survive. Far too many traders take a wild west approach to trading and sometimes it works for awhile, but when it's over, it's really over. They tend to walk away with empty accounts.

Trading while keeping your risk low will keep you in the game and put money in your pocket at the same time. Forex trading is a legit thing, but you have to be wary of the set up. You can make money, if you don't get carried away with taking on risk.

For more forex tips and ticks, you can follow me on twitter!

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