LOWERING TRADING RISK

Lowering Trading Risk or Trading Risk Management: 

There is always going to be risk on the Forex market. To believe any strategy to be risk-free is a fallacy. However, you can lower the amount of risk you face by following a few simple steps. With practice, you will also find that your successful and profitable trades increasingly outnumber the ones where you merely break even or lose money. The following are some simple ways to reduce your risk.

Create a Detailed Plan

If you don't know why you intend to buy or short sell a particular currency, don't do so in the first place. There are few worse ways to trade than to start trading without any sort of plan. Trading without a plan is the most sure-fire way to slowly, but certainly, drain your account.

If you plan well, however, you will grow to understand the trends you wish to use and the tendencies of other traders regarding your currencies of choice.

Use Your Trading Log

Your trading log is your best friend in the Forex world. By keeping a detailed log of all your activities, their purposes and the market's condition during those activities, your success will grow far more quickly than if you simply try to use intuition to figure out where you went wrong.

Your trading log will tell you where you went wrong with previous trades and will help you build on your successful ones. When you understand where you've gone wrong in the past, you can avoid repeating your earlier mistakes. You can also work on repeating your past successes by identifying patterns that will help you.

Every successful trade will show you more of what you're looking for. When you trade well, you learn how to be a more successful trader.

WHAT IS A LIMIT ORDER?

What is a Limit Order? Limit orders are trades on a currency pair where you wish to buy or sell your currency of choice at a particular rate. Contrary to a market order, a limit order allows you to exercise more control over your pricing and affect how much profit you end up making. The downside to limit orders is that they can take a long time to be fulfilled if the market isn't cooperative with your bid or ask price.

Why Limit Orders Exist

A limit order allows you to control the amount you trade for a particular currency. If you're following a trend and want to be sure you get in at a particular point on where you project it's going, a limit order is a very good way to ensure your target rate.

For example, you can place a limit order for AUD/USD for 1.0815. If the current rate is 1.0831, you have a 16 pips difference. It may be hours, days or even months before the pair trades for your intended rate, but when it does, you'll get it.

Another reason you might consider limit orders is because you can reduce your risk of loss and increase your likelihood of making a profit via their use. If you want to open a position on an especially volatile or low volume currency pair, this can be an excellent way to ensure you get it for the rate you want.

How to use a Limit Order

To use a limit order, begin by following the same steps you normally would to place a market order. Then, find where you select "limit order" and select it. At that point, enter your intended rate and whether you want your limit order to expire. Some limit orders will continue indefinitely until they're filled while others will expire at a certain time.

From that point onward, you may continue with your research, other trades or unrelated business. When the rate meets the one you establish, your position will open.

Similar Orders

A similar type of order to the limit order is the stop order. It serves in a similar function but in a slightly different way.

A stop order is similar in that it's attached to a particular price. It's different in that once your intended rate is reached, a stop order becomes a market order and is fulfilled at the market's price. This can sometimes mean your ultimate bid or ask price ends up being worse than you intended.

WHAT ARE STOP LOSS AND TAKE PROFIT ?

Stop Loss and Take Profit orders: Two of the most useful tools to trade the Forex market are stop loss and the take profit orders. While these are fairly simple to set up, both can be tremendously useful in your trading. A stop loss order is used to help you minimize any losses. A take profit order lets you close a position at a predetermined rate when it is reached. Used together these two types of orders are very useful for helping you maximize your profits and minimize your losses whenever possible.

The Stop Loss

A stop loss order is when you set a trade to happen if your currency goes in a direction that would cause you to lose money. For example, if you sold a currency short with the intention of letting its value decrease and buying it back for a profit, you could set a stop loss order if the currency moved upward a certain number of pips. Additionally, if you bought a currency and it began to fall, your stop loss would keep you from losing more than a particular number of pips by selling the currency automatically.

Stop losses are essential in the FX market because most traders use margins. If a margin call happens and you do not have a stop loss in place, you could end up being liable for all of the money you've lost.

Some traders use stop losses as their primary way to exit a position. For a trader with nerves of steel, there is the temptation to hold onto a currency position no matter what happens. In some cases the most pragmatic option is to simply cut your losses and move on to a more profitable trade. With a stop loss order in place, your trading window does this for you automatically.

The Take Profit

A take profit is an automated order you set so that your account will liquidate a particular currency position if you profit by a certain number of pips. This way you ensure yourself a profit. The downside to the take profit is that sometimes you get in on the ground floor of an especially profitable trend that continues long after you've exited, and you accidentally deprive yourself of an even more profitable trade.

How to use Them

Within reason, both stop losses and take profits are very useful in your trading. With a stop loss you can prevent yourself from falling victim to a margin call or simply limit your potential downside. With a take profit you can keep yourself from falling into the trap of excessive greed and make a potentially smaller, but guaranteed, profit from a successful trade. You should plan both your stop loss and your take profit orders whenever you intend to make a trade and before you actually open your position.

HOW TO OPEN A POSITION ?

Opening a position on the Forex market is slightly different from doing so on other kinds of markets. For one thing, you can open a position by either buying or selling a currency with equal ease. For another, you have several different ways to open a position. While every online trading site has its own unique interface, the methods of opening a position are similar wherever you decide to trade.

It's important to understand that opening a position means buying one currency and selling another. Even when we sell one currency short we buy a different currency instead. There is always one currency being bought and one currency being sold.

What you Need to Open a Position

The first thing you'll need to open a position on the FX market is a trading account. If you aren't yet comfortable trading with real money, a practice account will do. If you're using a real account, you must also have funds to trade with. If you have these two components and the market is open, you can open positions.

Types of Orders

The following is a list of all the basic types of orders you can issue:

• Market order
• Limit order
• Stop-loss order
• Limit entry order
• Stop-entry order
• OCO or one cancels other order

A market order means you either buy or sell at the current market price. By contrast, limit orders are used for entering positions at a pre determined price. A trader can utilize a Take Profit order to close his market position when he reaches his profit target. The stop-loss order is made so that your position will be closed when the currency price reaches the price you chose as a stop loss. With a Stop Loss order, traders can specify a closing point for a losing market position.

Limit entry orders will open when the price reaches the limit entry rate given. If you want to buy the pair the limit entry order will be lower than the current market rate. If you want to sell the pair it will be placed higher than the current market rate. Limit entry orders are used mostly for range bound trading.

By contrast, a stop-entry order is used to either buy for more than the current market price or sell for less, which is useful if you believe a trend will continue. A stop-entry order is the opposite of a limit entry. When you want to join a breakout in either direction (up or down) you place the stop-entry order outside of the bounded range. The trader placing this order believes that if the market reaches that rate the trend movement will be confirmed and continue in that direction.

Opening Your Position

In most Forex trading windows, all you have to do is pick a currency pair and select what you want to do with it. For example, if you pick GBP/AUD you can either buy or sell the first currency, in this case the British Pound. You are essentially borrowing Australian Dollars to purchase British Pounds or you short sell the Pound to get Australian Dollars, depending on which way you open your position.