Having the best forex trading system in the world is not the only thing a trader needs to stay away from losses. A trader should also have a solid forex risk management planned.
Forex risk management is a collection of ideas that offer downside protection for traders. That ideas include limiting the size lot, hedging, the hours or days to trade, and recognize the right time to take losses.
However, a lot of traders fail to implement those measures since they are only focusing on getting big bucks. They use too much leverage, even when they know that there is a big chance to lose everything in sudden.
Other than that, traders’ success on demo accounts can also become the factor of failure implementing risk-management. They become overconfident and unable to make the real moves when they have to implement it.
The first powerful risk management method is to know when is the right time to cut your losses. You can use a ‘hard stop’ or a ‘mental stop.’
A hard stop allows you to lock in a stop loss at a certain level in your trading platform. On the other hand, with a mental stop, you psychologically decide to decrease your possible drawdown to take. They both basically make you promise to yourself to jump ship at a particular point.
Those two methods are essential to resist your urge to move your stop loss farther.
Implementing the Right Lot Sizes
You may have seen many broker advertisements saying you can double your money in a single trade by $300 minimum balance and 200:1 leverage through mini lot trades of $10,000. But, remember, that is highly risky.
In determining your lot size, you have to start small, especially if you are a new trader. That way you can access greater flexibility to manage your trades.
Tracking Overall Exposure
It is good to reduce your lot size, but having multiple lots with currency pairs can surely cripple you. Imagine if you go short on EUR/USD and go long on USD/CHF, you get exposed to USD two times.
Once USD dropdown, you will suffer double. Thus, limited your overall exposure reduces your risk and increases your long-term success prospects.