Trading Risk Management: Top 5 Forex Risk Management Practices

If you’ve ever put yourself out there as an athlete, you’ll know how tough it can be to swallow defeat. In “The Mighty Ducks,” the classic movie about a group of hapless ice hockey players, the team bands together, get better and eventually wins. 

That is the dream of players on losing teams: that it ends. But turns out that’s all part of the process. Part of the athlete’s experience is learning how to cope and respond to mistakes. The same goes for trading.

It is all too easy to get lost in the game, all the more since trading can be a trigger for emotional responses. However, no matter how eternal, losing can allow traders to learn and grow.

In order to limit failure and avoid repeating mistakes, it’s important to understand the basics of forex risk management practices. Here are five everyday habits that might help in limiting your risk exposure.

1. Always Check Your Orders

Risk is unavoidable in trading. So as a trader, you must accept this will happen and learn from losses. Indeed, until you accept responsibility for whatever happens with your orders, history will most likely repeat itself. 

Accept responsibility and figure out what could have been done differently. It may involve checking your order frequently to avoid costly and unnecessary blunders. Make reviewing your orders before you confirm part of your routine. It will just take a couple of seconds of your time.

2. Realign Your Focus and Trading Plan When Needed

You might have been overconfident when you first started trading, but the market soon put you in your place. Building your trading system, testing, practising, and finally using it for successful real-money trading helps you develop healthy confidence over time.

Get back to basics after a big loss. Focus on the trading plan (along with any changes made to it) and your execution of it. Return to what drew you to trading in the first place: developing and learning a profitable strategy

Trading is hard, so return to loving and embracing the challenge. The wake-up call is often a big loss after a string of good times.

3. Secure Profitable Trades

Another common risk management practice often overlooked is taking some of your profits off the table while the price action is still in your favor.

Yes, it is tempting to ride a trend with a full position all the way to your profit target but taking off a portion of your position limits your exposure to potential volatility. After all, the adage “the trend is your friend… until it ends” didn’t appear out of nowhere, did it? 

Consider STA strategy or any other scaling technique, for example. Assume your trading strategy calls for you to add to your original position and move your stop loss after several pips

If you take some of your position off in the middle, you might still wind up with a small victory, even if the trend suddenly turns against you.

4. Take a Break From Trading

Do you feel stuck in your trading? Are your fundamental and technical analyses more frequently incorrect than you’d like to admit?  If you answered “yes” to these questions, you probably just need to take a break from trading

Every trader experience a bad day. Never allow a bad day to cost you more than a typical profitable day would. If your winning days average $100, you shouldn’t lose much more than that on a bad day. Control the downside. 

Avoiding the markets is that you are not emotionally invested in any position. Usually, doing so enables you to restart and evaluate market themes and chart patterns from a fresh perspective. And occasionally, taking a break will enable you to see what went wrong in your most recent few trades. 

So, take a break, try to avoid pip-making temptation for a while, and you will probably return with a clearer head and a better trading strategy.

5. Withdraw Your Money Regularly

While turning a few hundred dollars into a multi-thousand-dollar trading account is a great confidence booster, it is still a good idea to withdraw some of your money routinely. 

One reason is that having more money exposes you to impulsive choices like trading with bigger positions or engaging in excessive trading. 

Withdrawing some of your money is one of your best chances to reduce risk unless your trading objective demands raising your position sizes or your number of trades.

Conclusion

It may be a good idea to pause trading for a few days if you recently suffered a significant loss. Examine your trading strategy and your trading when you get back, identify the issues that cause the issue, and adjust your trading strategy as needed. 

Then, trade for a few sessions in a demo account to boost your confidence. Once you’ve had a few lucrative days and are starting to feel more like your old, successful self, you should only transition to life to trade. 

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