Monitoring position sizes
Work out what percentage of your funds will be used for any trade and stick to it. So, if you have a RM10,000 trading account balance (including any leverage), you may want to limit your risk by 1% or 0.5% per trade. This means you would risk a loss of RM100 or RM50 per trade. The other risk factor to consider is your pip risk, meaning you need to set a stop-loss order at the most appropriate point.
Placing a stop-loss order means the trade will close out after a specified total loss. You need to work out how many pips you are prepared to risk on any trade, ideally, this should be as close to your entry point as possible. You can find out more about pips in forex trading in our knowledge base. For many traders, placing a stop-loss is an absolute must.
Another common mistake made by new forex traders is failing to recognize the point at which to take profits. There are strategies you can use to manage the point at which to take profits. Probably the best solution for newbie traders is to put a ‘close position order’ in place to take profits at the appropriate level of resistance. Candlestick recognition and moving average crossovers are some of the other strategies used by traders, and you can find out more on our site.
Having a trading plan
From all the above, you can see it’s vital to have a trading plan in place for forex deals. It’s important you don’t rush into trading and perhaps risk 10% of your capital on one trade, 20% on another and so on. Because this is the way to lose all your trading capital in just a few losing trades, and then you’ll have no option but to quit.
Put discipline in place with all your forex trades, this way you can build your capital slowly but surely. You may not make thousands in a couple of days, but equally, you won’t lose thousands either!
Keep a trading journal
A trading journal is the best way to learn what you’re doing wrong and what you’re doing right. As we mentioned earlier, risk management in forex trading is all about reducing any risks you might face. But unless you’re actively analyzing your trades, you won’t be able to spot all the risks to your trading. A trading journal is the best way to do that.
Look for ‘confluence’
Confluence means where two points meet. In forex trading, what we mean by confluence is when two indicators are giving you positive signs to trade. The second acts as a kind of confirmation that there is a good opportunity ready for the taking. However, it’s worth mentioning what you see as a point of confluence, another trader may disagree; it’s entirely subjective.
By Monest | 9 December 2020