Risk Management Tips for Beginner Forex Traders

May 10, 2019 11:25 pm

Forex trading is a great way to invest your money; it is one of the ways you can invest when you come into some money. There are plenty of opportunities to profit from market volatility regardless of the foreign currencies you trade.

However, the high potential return of forex trading also comes with an equally high risk. After all, all investments are bound by the risk-return trade-off principle. What you can do is manage your risks to further maximise your return on investment (ROI), and we have just the tips in this article.

Trade Small

Limiting the size of your trading positions is the first thing you want to do in order to limit your risks. Rather than opening one huge position and risk everything, it is always better to open smaller positions and adapt to market changes.

Yes, you can earn £10/pip for every lot you trade (1 lot = £100,000) in EURUSD, but you also lose £10 for every pip against your position. With a smaller capital, you may be looking at the risk of getting margin called after a few pips in the wrong direction.

With smaller trades like a 0.1 lot, your risk is smaller too. You can absorb more market movements and be more profitable in the long run. A sudden market movement against your open positions will not result in those positions getting closed immediately.

Aim Small

Setting the right target profit is also important when managing your trading risks. Aiming for smaller profits is a good idea if you want to keep your trading risks at a minimum. You’ll meet those target profits sooner and can secure more pips in return.

This is why many professional traders still use scalping as a strategy of choice. Instead of aiming for 30 pips or 50 pips for every position, scalpers go for smaller profits (10 pips or fewer) but trade more often. Catching smaller movements in the market is easier too.

There are even brokers that specifically support scalping. You can see the list at InvestinGoal.com and immediately find a good broker that supports scalping and meets your personal requirements as a trader. You can profit regardless of how the market moves.

Watch Your Leverage

The next thing to note is your leverage. At 100:1, your £1,000 starting capital translates to £100,000 in allowed trading size. You can trade 1 lot of EURUSD without having to deposit all £100,000 into your account. However, you still gain £10 for every pip.

Back to our risk-return trade-off, that £10 of potential gain for every pip also means £10 of potential loss per pip. With a margin of £1,000, you basically have no room to anticipate market movement. Increasing your leverage to 500:1 or even 1,000:1 is not the solution either.

Keep your leverage at the lowest possible point according to your starting capital and adjust your trade sizes accordingly. Make sure your positions can comfortably float in the market without getting margin called – or hitting the Stop Loss – too soon.

Trading risks are very manageable, and you now have the tips and tricks to start managing yours. Use these tips to your advantage and become more profitable in the forex market.

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