5 Ways to Minimize Your Risks While Trading Forex

While the Forex markets offer you the ability to make large returns, retail traders don't seem to understand that the very reason that makes the Forex market so appealing also makes it particularly dangerous.

All of that being said, the reality is that Forex can be a great addition to your portfolio, as it helps you diversify away from some of the issues in other more traditional assets. At the same time, Forex accounts have a very low barrier to entry as they can usually be opened with a minimal amount of trading capital, allowing the general public to get involved quite easily.

Pay attention to leverage

While leverage, the ability to trade a much larger amount of currency than you actually have in the account, offers the ability to make massive gains, it also can lead to ruin quite quickly. Because of this, you should pay attention to the size of each trade you make.

You may have 100 times leverage, but that doesn't necessarily mean that you need to open up a full lot (100,000 units of currency) for every $1000 you have in the account. The most important thing a trader can do is protect their trading capital.

Keep in mind that when you take a loss, it takes a bit more of a percentage return to make that loss back. For example, if you lose 10% on the trade, in order to get back to breakeven, you will need to make an 11% gain. Furthermore, if you lose 50% of your account on a trade, in order to make that money back you need a 100% return. You should always think about this when trading and understand how compounding interest works in both directions.

Keep your expectations realistic

Adding to the thought about leverage, you need to keep your expectations realistic. Far too many retail traders believe that just because they can trade 100,000 units per $1000 of a currency pair, it means that they will place a few good trades and suddenly turn that $1000 into $5000.

While you do have the ability to make outstanding returns, you should also keep in mind that a realistic expectation of trading is necessary. There will be losses, so those should be taken into account. Not every trade is going to work out in your favor.

By dialing back the size of your trades, you get the ability to ride a smooth equity curve instead of erratic losses that cause devastation.

Never trade without stop losses

While this one may seem straightforward, there are quite a few retail traders that don't use stop losses. By doing so, they are inviting a margin call. While there is always concern of some type of "black swan event" hitting the market, the reality is that most traders who get blown out by not using a stop loss do so in a much more mundane way. It typically has them refusing to take the loss, and then entering the "praying" phase. This is when traders are simply waiting for some type of miracle to save them.

Furthermore, another common way the trading without a stop loss will cause ruin is that the trader forgets or is not aware of the fact that there is an economic announcement coming. Economic announcements can cause sudden shifts in the markets, which can cause massive losses if you don't get out of a trade when it's no longer viable. If it happens during an announcement, this can be a matter of seconds, and this can cause not only financial pain, but extreme frustration.

Never add to losers

Another major error that traders make is that they will add to a losing position. By "averaging down", traders, in theory, bring down their cost basis. When the market returns to the original direction that the trader thought was going to happen, it takes much less of a move to get back to breakeven or perhaps even make a profit.

However, more often than not, this will work out against the trader, and simply compound losses. You need to take your loss when the trade is working against you. It is more important to protect your trading capital and live to fight another day instead of worrying about one particular trade.

Realize that it's a marathon, not a sprint

When you become a trader, hopefully it's going to be for a long time. By understanding that each individual trade is just that - one trade in many, you cannot let any one particular setback, or gain for that matter, define whether or not you are successful or if you are a losing trader. Each trade is independent of others and should be kept that way. If you keep this in the back of your mind, you can avoid things such as revenge trading, which is trying to make your money back after taking a loss.

Most of the time, when traders do this, they are in an emotional state, and make another bad decision, compounding the losses.

You can also say the same thing about massive wins. If you get a really good result on a trade, you need to make sure that you do not "feel invincible", like most of us will if we are not careful. With that in mind, you need to make sure that any trade you take shortly thereafter are based upon your analysis, and not just a need to continue making profits.

In that sense, it should be noted that one of the most important things you can do when it comes to trading and increasing your odds, is to keep an even keel and pay attention to your psychology.