In forex trading, there are two main reasons why traders make huge consecutive losses. One is greed, and the other is a lack of good risk management strategies when trading.
In forex, greed refers to trading without a specific reason or without identifying an opportunity to trade. in other words, it refers to trading without a trading system or strategy.
Risk management, on the other hand, refers to strategies used to reduce the amount of losses in case the market moves against a trader’s trading strategy. For example, most traders are normally caught off-guard by Forex market news.
Greed management in Forex
The following are ways of managing greed:
- As a trader, you should always have a trading strategy. The trading strategy helps in identifying the kind of trade you should open; either a sell or a buy trade. There are trading systems available for free on the internet and you just have to learn how to use them. You can also invent your own trading strategy, but for a beginner, it is best if you went for the already invented ones since you may not have the required expertise to form one.
- A trader should at all times have a target of the amount of profit and loss he or she wants to do before opening any trade. And this target should not vary in the midst of trading and once achieved the trader should avoid trading unless his strategy says so.
- Never try to trade to recompense a previously incurred loss. As with any other investment, forex trading involves making losses and profits although your main goal should be to reduce the losses in comparison to the profits.
- The most important all is to respect your trading system. You should not go against your trading system by opening trades when the system says otherwise. Even when you incur a loss follow your strategy as long as the losses aren’t consistent.
- Then lastly, if you cannot control your greed, find another trader, especially a professional to manage your account for you.
Risk management in Forex
The most common and important methods of risk management that you should always use are:
- Use stop levels
Stop levels include stop loss and take profit levels and once these levels are attained the order is automatically closed.
A stop loss is a limit to the maximum loss that a trader is willing to incur. Once the market prices get to this level the order is closed with a loss. This should always be used whenever a position is opened. it should be set at a reasonable pip/point’s distance depending on the amount of funds in the trading account. The loss should never at any one time put the principal investment at risk of being wiped out.
Take profit is the set target of the profit the trader is looking forward to making by any open trade. Once the market prices get to this level the order is closed with a profit.
- Every trade should be opened with the right amount of lots depending on the amount of funds in your account. as a beginner, you should use the least amount of lots to open a trade that your broker allows.
- Lastly, you should never use your live trading account to try your newly invented strategy. The demo account is there for that reason. Anything that you aren’t sure about should always be tested in the demo account before being used on the live account.