4 ways to help minimize your trading risk
1. Choose your trade sizes carefullySome traders have a tendency to get caught up in quick price movements and open positions without thinking about sensible entry and exit points, stop loss positions and so on. This means they will often end up supporting positions too large for their accounts. Instead, you should always trade with a strategy based on thorough market analysis. Never let the adrenaline and potential for profit rule your head.
2. Limit your lossesAnother effective way to minimize your potential downsides is to employ stop-loss orders on every trade. Stop-losses automatically exit a position when a trade reaches a certain price point, therefore limiting losses or locking in profits depending on the point at which they are applied.
For example, imagine the euro is about to rise against the U.S. dollar, and that you have opened a position of 100,000 units at $1.4500. Placing a stop-loss order at $1.4460 would limit your maximum loss to $400 while also giving the trade room to potentially turn around should the market start to move against you.
3. Analyze the markets and the activity around themAs Sandy Jadeja, Technical Strategist of FX Solutions, states: “The methods of utilizing technical analysis are many and varied. They include such ubiquitous concepts as head and shoulders, support and resistance, trends, moving averages, and double-tops.”
Fundamental analysis also brings a host of potential catalysts into consideration in the form of major economic reports and news events. Analyse both past technical data and news feeds to gain a clearer picture of the state of a currency.
4. Spread your tradesThough you should only trade currencies you know, many traders find it safer to speculate on a number of different pairs than to put all their eggs in one basket. Understanding a range of currencies can help to diversify your risk and increase your knowledge of the activity beyond your trades. Remember though, diversification does not assure a profit nor guarantee against loss.