When it comes to bad risk management, the first thing that comes to mind is risk spike – it’s a mistake that has the ability to ruin traders completely. A personal risk spike is one of the most complicated management errors made by traders as it is very difficult to control.
You can never know when it will happen, but it can destroy your years of efforts within a second by striking when a trader is most vulnerable. Risk spike is not involved with sharp market movements or volatility spikes. Instead, it is personal and involves an entire lapse in a discipline, which is often momentary but can leave you to face dreadful consequences.
Therefore, you should take these factors into account for better risk management in forex trading.
Stop-losses
Placing stop-losses is essential for a successful trade. Stop-losses are orders that a trader places with a broker to buy or sell an asset when it reaches a predetermined price point. It limits the amount of your loss on a security deposit. You have to admit the fact that you will be facing losses while trading no matter what.
However, although you cannot stop them, you can at least limit the loss amount. Stop-losses may be placed pips away from the entry point or a percentage below the price you purchased the asset for. By taking this action, you can limit the total loss to the amount you set it to.
Taking profits
Leave your emotions behind when you want to pursue profits in forex trading. To prevent your emotions from clouding your judgment and making you react on impulse, you need a predetermined exit strategy.
Traders acting on emotion often tend to exit a trade with lower than those who follow logic and discipline strictly. It may be tempting to exit with the small profit you have made, but you need to resist the urge of being content with small gains. So, avoid exiting a trade manually just because you see things move against you.
The zigzag motion of the market signals that it is a matter of time only before you will see things swinging back in your favor. In this case, it is better to wait for the market to take you out. You may make a plan to set your trades and remain committed to it so the market flow can decide whether you will make a tidy profit or a small loss.
Position size
The most important thing to remember is that you must not risk more than you can afford to lose ever, but this is the mistake beginners make the most. You already know how unpredictable the forex market is. For example, the rate of a specific currency can be affected by the tiniest news. It can act in either a positive or negative way.
Traders can also earn a profit from such notice. However, controlling the greed to gain more can be difficult, so you must act wisely, getting a hold of yourself. The best option is following a sensible way instead of going all in. Risking more than you can afford is not a wise decision at all. Keep in mind that the forex market is affected by anything easily.
Position size is a huge factor if you want to make a profit out of forex trading. It is crucial to avoid risking more than 1% to 2% of a trading account at one time. Always keep in mind that increasing lot sizes also increases the amount of risk directly. In fact, this is the main reason why accounts blow out. This is why you must put much thought and preparation before establishing your position size.
Take time and do some calculations that can help you to determine how long you will need to recover your equity if you risk 5% or 10% at a time.
Common risk management mistakes most traders to do are –
Emotional control
If you want to be a successful forex trader, you should learn to control your emotions while trading. The most effective way of trading is going slow but steady. You cannot avoid losses while trading, but those are the situations when you must prevent your emotions from controlling you. You have to keep your head cool and maintain your feelings, or you will end up failing to achieve your goal.
Keep in mind that you have to go with the market’s flow to better prepare yourself mentally for it. Being stubborn and going against the market will not help you in going very far in trading. Even though you are following a long-term strategy while trading against the market, it is different. Patience is the key to success in trading, but it is not recommended to wait in a position too long. If you do it because of your stubbornness, you put your capital at risk. So, the moment you realize your mistake, immediately exit the market and wait to re-enter the market patiently.
Strategic trial and error: Get Better at Managing Risk
There are many trading methods that help in avoiding risk management mistakes. What you need to do is test them so you can find out the one that is the most suitable for you. Do not go for the so-called best method all the time blindly because it may not always work for you. When you choose your trading method, choose the one that goes with your trading style and fulfills your desire. Strategies work differently for every trader. Whatever method you choose, you must follow it properly, and it must be a practical one.
Final thoughts
Mistakes are bound to happen, but you need to learn from them. Your time and efforts are the greatest investments in trading. By gaining knowledge from studies and trading mistakes, you will be able to gain profit in the future.
