Forex Trading is always going to contain some level of risk. There is always a risk that the currency will become more volatile that you expect. You can find ways to mitigate that risk and make your results somewhat more predictable. Some of the ways to reduce the risk are obvious and some less so. Here we will try to lay them out for you in 5 clear steps.
- Have a well thought out and well planned Forex Trade strategy. Having a trade strategy that is consistent with your philosophies and money management ideas, based on study, experimentation and excellent advice is invaluable. BUT it only works if you stick to it. Just as important as having a good plan, is sticking to it and not swaying for emotional reasons. Trade with a plan not your heart. Test your plan using virtual trading methods and not real money. Make sure it works and tweak it if necessary.
- Choose a currency that is strong and consistently rising. High debt usually is a precursor to high inflation. When inflation rises, trust in the economy and its currency decreases. If you pick a strong currency, it will serve you well. Countries with a low debt and a high gross income will have strong rising currency.
- Invest in currency-hedged funds. These can be either single currency or multi currency. These funds usually deal in what amounts to futures in currency, called currency forwards. Forwards lock in currency prices and will not follow the fluctuations in that currency. These funds are less volatile than non-hedged currency funds and will be more expensive because they protect you from some significant losses.
- Spread out your investments all over the globe. Weather can affect a whole region of the world, so can other current events that affect Forex Trading. If your investments all lie in the same region, anything that affects one country is likely to affect your entire portfolio. Also often countries in the same area link their currency similarly which can also affect your entire portfolio when it is invested in one region’s currency.
- Utilize Stop Loss and Limit orders. These are built in risk protection. Setting your stop loss at an amount of loss you can live with will allow you to trade with more security against losing a fortune. Predetermining when it is time to cut your losses and leave you position protects you and minimizes the risk of being afraid to fail and just falling harder. Limit orders protect you in a similar manner. You can set a minimum or maximum price that you would like to buy or sell this particular currency. If you set these in advance the chances are that you will stick to the plan rather than letting your emotions get the best of you. These mechanisms can be used based on your tolerance for risk taking but will give you more control of the risk factors involved in Forex Trading.
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