The investment world certainly can not be separated from risk. The applicable law is that the greater the potential for profit, the greater the potential risk, as well as in forex trading. Forex is classified as the type of investment with the highest risk. This has been mentioned in many sources. The forex profit potential is higher than deposits, stocks, or mutual funds; but the risk is also even greater.
Related to the risks that must be faced, if you want to start trading forex, special tips are needed to reduce or even reverse your position which was minus to be positive and gain profits. According to Investopedia, the best traders need to incorporate risk management practices to prevent losses from getting out of control.
Check out the following tips to reduce your trading risks:
Cut loss
This is the action of closing your position as opposed to market price movements. Cut loss
used to limit losses suffered so as not to cause even greater losses.
For example, in the GBPUSD pair, you open Buy at 1.8000. Opening a Buy position means that we expect prices to rise above 1.8000 in order to make a profit. Your hope is that prices will move up to 1.8100 so that you can get a profit of 100 points. It turns out that prices move against your expectations, prices move down continuously from 1.8000 to 1.7980 and still show a downward tendency.
Rather than you experience further losses and ultimately experience a margin call, it is better to close the position even though you bear a loss of 20 points (1.8000 to 1.7980 = -20 points). This action is called a cut loss that is closing a losing position in order to prevent greater losses.
Switching
This action is similar to cut loss. The difference is that, after closing your losing positions, you open new positions in the same direction as market price movements.
In the same example with the cut loss above, then you close your position at 1.7980 then you open a new Open Sell position because the price tends to decrease. Thus, if prices continue to fall to 1.7900, then you experience a loss of 20 points but get a profit of 80 points (1.7980-1.7900 = 80). Thus, you still get a profit of 60 points.
Averaging
This method requires extra capital in order to maintain the position that you have opened which turned out
move against market prices.
In the same example with Cut Loss above, then if you want to take action averaging, you open a new position. But in this case, it is not like switching that closes your losing position and then opening a new position which is opposite to your previous position on the grounds the price has moved down. In averaging, you do not close our positions that have been opened (in this case Open Buy) and you even add them by opening new positions in the same direction that is Open Buy again.
Why so? Didn’t you have Open Buy before and suffered a loss, so why do Open Buy again?
The reason is simple, you hope that because the price has gone down, the price will rise again so that when you do the second Open Buy it is expected that the price will move up even beyond your first Open Buy. Thus, you can get a double profit.
The third risk management above is very simple and easy to implement. However, there is no guarantee that you will never experience loss after implementing those tips. If you look closely, the three risk management above rests on one thing, that is the ability to analyze price movements. Risk management can never even be effective if you are not able to do the analysis correctly and accurately. Thus, knowing the analysis is a necessity in starting investing in forex trading. Good luck, traders!
Read more: The Importance of Risk Management in Forex