While many retail traders think that technical analysis is enough to cover their weak spots, the reality is harsh and requires any trader to use a wide range of various tools to just stay competitive. Knowing how every single technical indicator works won’t save you from losing a ton of money if you do not understand how to manage risks efficiently.
There are several important rules that you should remember when dealing with the Forex market. We will guide you through several of them.
Rule #1. Use assets that you understand.
The alarming statistic from the Forex industry is that over 30% of all traders do not have any background in financial markets and investing meaning that many are dealing with financial instruments for the first time. However, it does not mean that you cannot apply your lived experience when investing in Forex. The industry offers access to a wide range of different assets including:
- Currency pairs with some very exotic options like Brazilian Real. The selection varies from highly volatile assets to predictable.
- Commodities are best used by people who understand fundamental analysis and can easily identify potential directions for prices on oil, gas, precious metals, and agricultural goods.
- Cryptocurrencies are novel assets that are usually represented only by derivatives like perpetual futures and options. Tokens like BTC and ETH are wildly volatile compared to many other assets.
- Stocks and indices are usually traded via CFD contracts. These suit fundamental analysis approaches the most.
Among these assets, you will see something that you’ve worked with. Whether you have experience in heavy industry, retail, financial markets, IT, or any other domain, you will be able to find something that can be forecasted by using your experience. Use only those assets that you understand on an intuitive level.
Rule #2. Do not borrow too much when using margin trading accounts.
The ability to use leverage is simultaneously a blessing and a curse for a modern retail FX trader. While credit lines from brokers open opportunities for those who want to focus on day trading or do not have a large capital, using leverage can be detrimental to your portfolio in the long run.
Contemporary FX brokers offer various ways to alleviate this issue. Some have flexible margin accounts where users can choose the size of leverage and enter long-term market positions while managing the risk related to using borrowed funds. Other brokers may simply limit the size of credit to ensure that their traders understand the ramifications of irresponsible usage of leverage.
There are only two reasons to use leverage:
- You are using scalping or spread trading techniques that provide relatively low returns but consistently. This strategy may benefit from using leverage to increase returns.
- You have a very reliable signal and market analysis indicates that a long-term market position can be profitable. If you have confidence in the outcome of your order, use leverage.
Rule #3. Never forget a stop loss!
The ability to put a stop loss below a certain threshold is extremely useful when it comes to risk management. You should always set up take profit goals and stop loss commands whenever you enter the market. The former allows you to not overextend a position, the latter allows you to cut losses whenever the price moves to close to an uncomfortably low or high value.
Choosing the right value for a stop-loss can be quite challenging. Technical indicators like Ichimoku and Moving Averages can help you identify potential support and resistance levels providing you with estimates of where you should put take-profits and stop-losses.
Conclusion
Risk management is the most important skill for any Forex trader. Since this financial market is so volatile, it provides endless opportunities to make money and just as many opportunities to lose everything. Be careful and make trades only when you see an online trading signal with multiple confirmations. Make sure to use risk management tips when engaging with the FX market! More forex and crypto news.