How to manage trading risk?
First we need to understand the differences between trading and investing. Trading is relatively short term with a clear plan in mind as to when and at what price to enter and exit, thereby increasing trading frequency. Investing, on the other hand focuses on the longer term with a much vaguer plan and lower frequency. We know that forex is highly volatile therefore we should keep to trading instead of investing to reduce our risk. It’s ok to use lower leverage instead of the highest leverage offered by broker. While higher leverage may increase your profit, it also increases your losses. To keep yourself on track and not overtrade, pick a lower leverage and focus on protecting your capital.
The use of ‘Stop Loss’ is extremely important. Some trader are reluctant to put up a ‘stop loss’, fearing they will be ‘stop hunted’. ‘Stop loss’ is more of a concept, where you know when you should get out when price is going against you. If you are able to monitor your trade throughout and having a mental stop loss, then you can do without the physical stop loss, else it’s better to be safe than sorry. One must always know the maximum amount at risk for each trade. These risks should only be a small portion of your capital, to ensure that one is not overly emotionally affected by a lost and able to sustain losses for a long run. If you’re only risk 1% of your capital for each trade, you are then able lose 100 trades in a row. I’ve yet to see anyone losing 100 trades in a row.
Note that when you’re holding a position overnight, not only are you exposing to swap rate charges but also the thinness liquidity period throughout the day. This period is also more prone to market crashes as there are fewer participants in the market. Keep the concept of trading in mind, make short trade and avoid overnight trade to the best you can.
Only trade when you have time and never force a trade just because you made an effort to watch the market for the past few hours. Take notes on incoming news that might affect the market even if you’re not a fundamental trader.
Lastly, make a checklist or write down a journal before and after entering a trade. This is to ensure all entry conditions has been met instead of trading based on emotions. Alternatively form up online trading community with people having the same objective to keep each other on track. https://www.alpssocial.com/ enable user to create community for free.