Risk Management Strategies
The difference between a successful investor and one who loses everything is rarely defined by luck. On the contrary – the successful investor will approach each trade with the caution of a professional mountain climber – trying to predict each and every possible mishap and taking every step to avoid it.
In forex, this boils down to 3 basic elements:
• Know your asset.
• Know your limitations.
• And set a win to loss ratio.
Know your asset
Like the performer who makes tightrope walking seem easy – knowing what to invest in, when and how much, are a result of hard work. Before investing in an asset, research it. The same computer you place trades with can be used to search for information – to Google the asset, as it were. Look for news items; try to gauge market sentiment. Open some historical charts and check out how the asset has reacted in the past to various events. Now come up to the present and examine the present. See how the chart compares with the day’s news. Try to define whether your asset will rise or fall, and at what price you should open a position. Take a good look at the value fluctuations, and set your stop loss and take profit points. Then, make your move.
Know your limitations
Leverage is a wonderful tool. Without it you probably wouldn’t be here. You’d never have been able to mobilize the cash necessary to make a noticeable profit from forex in the first place. On the other hand never invest more than you can afford to lose – most gurus say never more than 2 to 5% of your equity. Calculate your trade volume taking into account the leveraged loss you could take at any point, and set both your lot size and stop loss values in accordance. Do these with a clear head, and – once your position is open – don’t alter your limit orders based on some momentary whim.
Which brings us to the last point:
Set a win to loss ratio
The moment a position begins to lose, re-evaluate your trading position. Make sure you don’t lose more than you win. You may have set your stop-loss below a specific value, and yes, every position you open begins with the loss of the broker’s spread. But if the asset is losing money, don’t wait for miracles. It’s always smarter and safer to invest with the market than against it. And if all those traders are abandoning an asset, you should too. You’re not yet big enough to afford playing games and out-thinking experienced speculators.
Learn to manage your assets, diverse your positions and set proper limits.