Use software programs for help
To progress in Forex you may want to utilise certain trading software that can help you settle on your choices. That being said, these systems aren’t perfect, so it’s best to use them as an advisory tool and something to fall back on rather than using them as the basis for trading decisions.
Limit the use of leverage
It can be extremely tempting to use leverage to make significant profits. However, this can make it much easier for you to lose huge amounts of capital too. So don’t take gigantic leverages. All it takes is one quick change in the market and you can easily wipe out your entire trading account.
Forex risk management is not hard to understand. The tricky part is having enough self-discipline to abide by these risk management rules when the market moves against a position.
Risk management for frequent traders
If you trade frequently, one of the main ways of measuring and managing your risk exposure is by looking at the correlation of your FX trades. Before we begin explaining how to do that, let’s first explain what correlation is.
In stocks there is a common index called beta, which shows how the stock is expected to perform depending on changes in the industry. Generally, when trading stocks and looking to reduce risk, a trader would try to combine the stocks that would result in a compounded beta that equals zero – as some stocks have positive beta and others have negative.
There is no beta in Forex trading, but there is correlation. The correlation shows us how changes within one currency pair are reflected in the changes in the other currency pair. Generally, if you are trading closely correlated currencies (like EUR/USD and AUD/JPY), you may expect them to have a common trend. In other words, whenever EUR/USD goes down, you could also expect to see a downward trend in AUD/JPY.
So how can this help to measure Forex risk exposure? We all know that risk is mainly driven by margin. This is why you should mainly trade the pairs that don’t have strong positive or negative correlations, as you will simply waste your margin on the pairs that result in the same, or complete opposite direction. As a rule, currency correlation is also different on various time frames. This is why you should look for an exact correlation on the time frame you are actually using.
You can manage your Forex risks much better when paying close attention to the currency correlation, especially when it comes to Forex scalping. Whenever you are engaging a scalping strategy, you have to maximise your gains over a short period of time. This can only be achieved by not trapping your margins in the opposite-correlated assets.
Managing your risk is vital if you want to succeed as a Forex trader. This is why you should adhere to the aforementioned principles of Forex risk management.