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Forex Risk

Here we will take a look at Forex risk which is inherent in trading currencies and how to manage and reduce risk, in your trading strategy to help you achieve long term currency trading success.

Speculation or Investment

Many people see Forex trading as a high risk speculation rather than an investment but the fact is all money making ventures are speculation. Investment sounds better of course - but you can lose investing, just as you can lose speculating.

What Makes Currency Trading Risky?

Any trading is risky and as soon as you place a trade your money is at risk from an adverse move against you. This said, currency trading is not really any more risky than any other investment but what does increase the risk is the leverage available to traders from Forex brokers.

Leverage and Risk

Most Forex brokers will offer clients leverage so they can trade up to in some cases 500 x the amount of money they invest. On just a 100:1 leverage, a trader with a 1,000 dollars can trade a $100,000 and using leverage increases the risks of Forex trading. If you are on a 100:1 leverage a move of just 1% can wipe out your equity. Furthermore, fees and pip spreads, are calculated on the leveraged amount which impacts on your deposit on 100:1 leverage for example many traders find themselves having to cover, several percent in fees just to break even on the trade.

Most novice traders use to much leverage and this means, they quickly lose their deposits but of course you don't have to use any leverage at all and can still make good profits. Our own view is to use a maximum of 10:1 in leverage which will allow  you to make big gains but keep risk at manageable levels.

Risk Reduction and You

Risk is of course inherent in any trading but risk can be reduced, by any trader who has a sound Forex trading education.

Its a bit like a high performance car, if driven by a person who has just passed their driving test the risks are higher than if the car is driven by an experienced rally car driver. To make big gains you have to take a risk, there cannot be the rewards of Forex trading without taking risk but there is a big difference between taking calculated risks and being rash, as the famous general, George Patton Once said.

Now lets look at how to reduce the risks of trading and get the odds on your side to make bigger profits:

Reducing Risk and Increasing the Odds of Trading Successful

Here are some simple tips to maximize the risk to reward of trading currencies which you can incorporate in your FX trading strategy.

Do not over leverage your currency trading as we have seen this is a major reason why traders lose – keep your leverage down.

On any trade you place make sure you have a stop loss in place – on any trade you have make sure you have a cut off point and be prepared to take a loss. Not placing stops will see you run losing positions as your emotions get involved so don't make this fatal error.

Be patient – many traders make the mistake of trying to trade all the time and they assume the more trading signals they place, the more money they can make but the opposite is true they will end up taking trades with low odds of success and lose. Be patient and only trade the best high odds set ups.

Make sure, you learn Forex trading the right way and get a solid education which is based on the reality of Forex trading and NOT the hype which is sold online. Its a fact that anyone can enjoy Forex trading success but most traders, lose money so pay attention to the next point!

Don't Follow Conventional Wisdom!

Most Forex traders follow what they consider is accepted Forex trading wisdom and of course we all know 95% of traders lose money following it! So don't believe any of the so called wisdom below, it will turn Forex into a high risk venture for you and probably guarantee you will lose.

Do NOT try Forex scalping or day trading – All you will be doing is trading random volatility and lose. There are numerous gurus and FX trading system sellers who will tell you, day trading or scalping can reduce risk but its actually, the highest risk trading you can engage in. Avoid it at all cost and focus on trading longer term trends, where the risk reward is more in your favour.

Do not believe, you can trade with scientific accuracy with robots or Expert Advisors! Again this is promoted as a low risk way of trading but these junk systems are all hype and lose money. If you think you are going to make a huge regular income with low risk think again – you will lose.

Do not seek perfection in your trading, always get into trends when there confirmed and get out of them early and bank profits – always trade with discipline and keep your emotions under control or you will lose. When trading Forex, you are the key to your success is the way you think and trading with discipline is the key to your success. In Forex trading, it's not the market which beats the trader – its the trader who beats himself.

Final Words

Forex trading involves risk but so does life. You take risks everyday when you drive to work or walk down the street – life is a risk and of course Forex trading is too.

Forex trading maybe risky but there is much you can do, to mange and control risk and enjoy Forex trading success. The fact is - anyone can learn to win but most traders fail to understand the reality of trading Forex and how to reduce risk by, using sensible leverage and a logical and disciplined FX trading strategy.

When you trade Forex you are a bit like a captain at sea, you know that the ocean is all powerful but you don't need to fear it – if you understand it and respect it and know the risks present, you can steer your boat, from your fishing trip to shore and enjoy, the rewards of your catch. Forex trading is very similar to fishing in an ocean and if you understand this fact, you can win at currency trading.

The market will give you profits if you respect it, understand it and have a strategy to profit from it. Forex risk is inherent when you trade but as you can see, anyone with the right strategy and mindset can enjoy success.