Foreign exchange is one of the largest and most liquid financial markets in the world, making it highly profitable. It also holds promising prospects for the future, as Yahoo reports that the foreign exchange market is expected to grow by USD 1.94 trillion from 2021 to 2026 at an 8.87% compound annual growth rate.
However, to secure success in forex, you will have to learn proper trading techniques. Our article ‘What Is Forex Trading And How Does It Work’ explains that an important skill in this aspect is learning risk management. So, if you’re trading forex, or are just starting to, then here are some good ways to lower your risks in 2022.
Pay Attention to Your Risk Tolerance
Before anything, determining your risk tolerance allows you to make better decisions to suit your financial situation. Some factors that may come into play with your risk tolerance include your knowledge and experience of forex trading, your investment goals, and how much you’re willing to lose.
Once you’ve set your risk tolerance, make sure to keep it consistent even if you’re already making greater profit. Keep it conservative when trading, ideally risking no more than 1% of your available capital per trade. This is especially true if you’re only just starting and are more likely to make mistakes.
To make sure you’re not going beyond your risk tolerance, make sure you also set a risk/reward ratio (RRR). WallStreetMojo defines RRR as the potential loss in relation to potential profit. A good number for beginners to intermediate traders would be at least 1:2.
Trade Major Forex Pairs
Major forex pairs are the most commonly traded pairs in the world. These pairs could be the best trade options for forex traders since they’re known for their relative stability. This year, these pairs usually include the following: EUR/USD, USD/JPY, GBP/USD, and USD/CHF.
Some also opt to trade minor — or even “exotic” pairs — which many brokers offer. Minor pairs include EUR/GBP and GBP/JPY, while exotic pairs include JPY/NOK and AUD/MXN. However, it’s important to note that these currency pairs don’t perform as well as major pairs, so these trades may lead to lower profits. All in all, traders would fare better with the more established major forex pairs.
Use Forex Trading Tools
Forex tools can help traders predict current movements in the upcoming day or even the week. Economic calendars list important economic factors that could affect the fluctuation of currency pairs, such as gross domestic product, central bank meeting dates, and employment and inflation data. Likewise, financial news wires can give traders timely updates on news events that could affect the market.
You can also use forex volatility charts and calculators. This trade volatility guide on FXCM informs us how these tools can take historical data from a currency pair’s previous performances from different time frames to determine their historical volatility. Volatility charts even illustrate how currency pairs are performing in real-time and what their current volatility is. With these tools, traders can better assess their strategies and make decisions on their next moves.
Always Use Stop-loss Orders
Stop-loss orders are instructions to your broker on when to place a trade. They automatically close your trade once the price hits the level that you’ve specified. In this way, it limits your losses on an asset. This counters traders’ tendency to hold onto a losing trade in anticipation of a rise in prices, which could potentially lead to greater loss. Stop-loss orders automate certain transactions in order to protect you from further losses. Most forex platforms offer this feature.
Trading of any kind requires trial and error when mastering your techniques. But fortunately, even early on, you can build good trading habits as a foundation by practicing these risk management techniques. For more trading tips, read more of our finance articles here at Bulliscoming.com.