Reducing risk when trading Forex

Forex is risky. You are risking money on a market where price fluctuates every second of the day, 24 hours a day. Add leverage and a lack of trading education and you have a concoction of blown trading accounts and hurt bank balances.

On the flip side, when Forex trading is done properly, trading Forex can provide a substantial income and be an extremely rewarding career. But how does one trade Forex properly? Apart from having a profitable Forex trading strategy and minimising trading emotion, trading relies on strict risk and money management.

Forex trading risk

Risk Management Tip #1 - Position Sizing

Risking too much per trade is a quick way to lose a lot of money. Professional Forex traders will risk anywhere from 0.1-1.0% per trade, when swing trading. For day trading, you should be looking to risk even less. Too many uneducated traders risk far too much per trade. I have known some traders to risk 5%+ per trade and then wonder why they are not making money!

Reducing your position size will help reduce trading emotion and psychology and will ensure you have enough funds/capital to trade even after a series of losing trades.

If you need help calculating your position size, I suggest you watch this video on calculating position and pip size.

If you are swing trading, I suggest you risk 0.5-2% per trade. If you are day trading, I suggest you risk 0.1-0.5% per trade.

Risk Management Tip #2 - Account Size

It is one thing to risk too much per trade, it is another thing to risk money you cannot afford to lose. Do you want to increase the psychological challenges of trading and make Forex trading an emotional roller coaster? If yes, then fund your account with life-savings or debt and buckle-up!

Never risk more than you are willing to lose. That includes each trade as well as your trading account. Most newer traders blow their accounts, are you willing to lose everything? If not, don't fund it.

Risk Management Tip #3 - Broker Risk

I cannot tell you the countless emails I have received from traders who have lost money by opening trading accounts with fraudulent Forex brokers. A lack of Forex education can lead people to open accounts with brokers that are obviously a scam, well obvious to those with some experience. To help prevent you from doing this, here are some quick suggestions...

1. Ensure the broker is regulated by either the FCA (UK), ASIC (Australia) or the NFA (US). Brokers without regulatory bodies or that are regulated by some exotic financial body should not be trusted. In recent years, some legitimate brokers have opted for Cysec (Cyprus) regulation.

2. See where the brokers offices are based. Having an office in the country or at least continent you reside in is always a good sign.

3. Don't be fooled by online reviews. Fake brokers can create positive reviews that are positive and even the best Forex brokers can have lists of negative reviews. Online reviews and chat forums are not to be trusted.

4. Check out the Forex brokers that professional traders and educators recommend. These brokers are usually legit and are well regulated.

Technical Forex highly recommends IC Markets. They are a Forex broker based in Australia with offices across the globe. They are regulated by the ASIC.

To open a free trading account with IC Markets, please click here.

Risk Management Tip #4 - Broker Risk Continued...

Just another quick tip, do not allocate all your trading funds to your brokerage account. Let's say you have 1,000 Euros, Pounds or Dollars to trade with. Thanks to leverage and instant deposits offered by brokers, there is no need to hold the full 1,000 units of currency with the broker. I suggest you hold as little as possible.

Brokers can go bust. If your Forex broker goes under, your funds are going to be locked until the administrators have done their work. Even then, there is no guarantee that you will ever get your funds back.

The FCA offer compensation of up to 50,000 GBP if a broker goes bust that is regulated by them. Having a broker regulated by the FCA is a great idea. Having as little trading funds with a broker is also a great idea.

Darwinex are a FCA regulated Forex broker. You can open a free demo trading account by clicking here.

Risk Management Tip #5 - Leverage

Leverage is great. I love it. Without leverage, retail trading the Forex market would not exist. BUT there is a warning here. Leverage can allow traders to hold a vast amount of positions with little margin and hold positions far too big for their trading account size.

Leverage at 1:30-1:50 should be adequate. 1:100 max.

Summary

Forex trading is fantastic. I love it. It provides great opportunities and enables people like me to work from home and be my own boss. But trading Forex does come with potentially HUGE risk though. Ensure that strict risk and money management principles are adhered to. Otherwise trading can lead to heartache and a loss of cash, rather than the freedom that was originally sought after.

This post was written by Samuel Morton. Samuel is a professional Forex trader. You can learn more about him on his Forex trading website.