But Forex trading is high-risk speculation and
60-90% of traders will lose money, depending on their Forex broker. Most
traders lose money because they haven’t created (or don’t follow) a
risk-management strategy that keeps losses to a minimum.
Creating a successful risk-management strategy
takes time, education, and patience, but there are a few simple ways to
minimise your risk.
Use a well-regulated broker
This may seem like an obvious one, but the
number of beginner traders who fall for Forex trading scams and/or trade with
unregulated brokers is huge. Beware brokers or “Forex experts” who contact you
over social media with promises of guaranteed returns. All well-regulatedbrokers will list their licences at the bottom of their website, and it is only
a matter of a few clicks to verify their regulated status with the relevant
authorities. Well-regulated brokers will also offer negative balance
protection, so you can never lose more than you have in your trading account.
Test your strategy with an unlimited demo
account
All brokers will offer a demo account, which
behaves exactly the same way as a live trading account except the money is
virtual. Most good brokers will offer a demo account that never expires. Having
an unlimited demo account means you can test your strategies and practice what
you have learnt without taking any risks at all.
Keep your leverage low
Once you start trading with a live account,
it’s important to be aware of the leverage you are using. Some brokers will
offer leverage of 1:1000 or even 1:2000, and while multiplying your trading
capital by 1000 or 2000 may seem like a good idea, the multiplying effect of
leverage also applies to any losses you make. Best to start with 1:100 as a
maximum until you are comfortable with the effect leverage has on your trading.
Trade the Majors
The “major” Forex pairs are the most traded
currency pairs in the world, and they all involve the US Dollar: EUR/USD,
USD/JPY, GBP/USD, and USD/CHF. These pairs are generally the most stable too.
Most brokers will also offer “minor” pairs and “exotic” pairs too, such as
EUR/TRY (Euro/Turkish Lira) or AUD/MXN (Australian Dollar/Mexican Peso). These
exotic pairs are more volatile and your trading costs will be higher than with
majors.
Stay away from crypto
Many Forex brokers will also offer
cryptocurrency CFDs, such as BTC/USD (Bitcoin/US Dollar). Leverage will usually
be very low, as cryptocurrencies are notoriously volatile. But price changes in
cryptocurrencies pairs can be huge and unpredictable, and the risk of “wiping
out” your trading account is much higher than with normal currency pairs.
Use a good copy-trading service
Many beginners do not have the time to watch
the markets all day. Thankfully, many brokers have copy-trading services.
Copy-trading brokers allow beginners to copy the trades of more experienced
traders, who then take a small commission from the profit. Most copy-trading
brokers will provide a breakdown of each experienced broker’s success rate,
risk profile and maximum single loss (called a “drawdown”), this allows
beginners to copy a trader which suits their requirements.
ALWAYS use a stop-loss
The final tip for preventing major losses in
Forex trading is to always use a stop-loss on every trade you open. A stop-loss
will automatically close your trade once the price hits a pre-defined level.
Human instinct is to hold on to a losing trade, hoping it will become
profitable. Unfortunately, this is usually not the case. A stop-loss can
prevent a losing trade from wiping you out, or can lock in a modest profit, and
is one of the most powerful tools in a trader’s arsenal.
Summary
As mentioned at the top, Creating a
risk-management strategy takes time, education and experimentation (with a demo
account of course!), but these eight tips will provide a good foundation and
stop you from losing your shirt in your first forays into the Forex markets.