5 Risk Management Best Practices for Trading Successfully in Forex and CFDs
Forex and CFD (Contracts-for-Difference) trading utilize leverage, which can make you either profits or losses. The more the potential profit to be made, the higher the risk level.
Before you embark on trading Forex and CFD, you need to know that accepting risk is a requirement for trading using leverage.
There are numerous trading risks in Forex, as there are multiple ways of reducing them. The following are the basics of minimizing losses via Forex risk management techniques or strategies.
What is Risk Management?
Forex risk management is premised on four tenets:
- Recognition of Forex risks
- Analyzing and evaluation of these risks
- Finding solutions which reduce the risks
- Management and application of these solutions
The market assessment is critical for both new and professional traders. The right market positioning is crucial, but an experienced trader knows that managing risk is equally vital.
1. Leverage Effect
One of the primary reasons for traders choosing to trade in Forex and CFDs is accessing leverage. Leverage provides a reduction in margin requirement as opposed to a full investment. You invest less to get more, but the market might not be right on the flip side, and you lose more.
The higher you leverage, the more you stand to gain or lose. If you experience losses, it might be due to over-leveraging. This means you might have chosen leverage with too much risk attached to it.
Trading with small investments works well in preventing over-leveraging and reduces your profits. Always select your leverage carefully and according to the volume of your account.
2. Wrong Market Assessment
Forex and CFD trading depends on consistent movements in the market. Each order starts slightly on the negative since the difference between the bidding and asking price, or the spread is deducted once the order is opened. Your market assessment cannot always be right, and you will sometimes lose money.
The amount lost can be kept in check by setting up a stop-loss mechanism at the level you decide you want to accept a loss. You can easily set up the automated stop loss in your MT4 account platform. Setting narrow stop losses might lead to the closing of your order on a minimal market movement.
3. Rapidly Moving Markets
News, trends, politics, and opinions are continually influencing the market. No matter how much you pay attention to the market, it is impossible to know everything that happens or before it happens.
You can set up automated mechanisms, much like the stop loss, which stops your trading order on your behalf. However, remember that stop loss cannot avoid loss in its entirety. You need to indicate when action should be taken to reduce the loss.
4. Market Gaps
Market gaps are massive price leaps shown on a trading chart. Market gaps occur when markets are closed.
However, open markets also react to sudden economic news that may cause trade orders to close away from the desired point.
This is important since automated mechanisms such as the stop loss only close your order at the next quote after a jump.
Risk Management Tools
You can manage your risks by:
- Knowing your limit
- Rightly choose your leverage
- Calculate your order size
When considering risk factors in your Forex and CFD trading, it is worth considering external factors. Some external factors can also influence trading quotes. These include:
- Poor internet connection or power outages
- Being too busy or distracted by other things
Being a first time trader, you might feel a little disappointed when things do not go as planned, and you experience losses. Losses are part of the experience, and you need to know that losses are inevitable and how to deal with losses.
Forex and CFD trading can be quite a profit maker, but you have to be very careful and alert in choosing risk management strategies to make your venture in forex trading success.