Today, to become a successful trader, it is not enough to have bright intuition and a decent knowledge of Forex trading terms and rules. Really good results can be achieved only if one masters a well-formed strategy.
Naturally, the strategy does not guarantee that all your Forex transactions will bring you 100% profits. However, it will help to increase your trading account balance by the end of the day, week, month, or year.
There are various trading techniques, but every novice Forex player should have a risk management strategy in the first place. If you are having trouble choosing a strategy, use the support of the DotBig Forex platform. Here you will receive expert recommendations and will be able to start trading Forex like a true professional.
What is Risk Management?
Many Forex dealers confuse the concepts of money and risk management. In the first case, it is the ability to manage funds, and in the second, the ability to limit your losses during trading.
Forex trading is a high-risk activity of earning money. Making a profit in the dealing process is not yet a complete guarantee of the success of all trading activities. It is also crucial to learn how not to lose income. Risk management is a part of a trading system that indicates a specific number of lots used at a certain point in trading. In other words, it’s about managing the size of the bet.
Professionals, using certain counting systems, determine exactly how much money can be risked when opening the next position. They use such systems productively and constantly.
Since all Forex trading is mainly based on the trader’s emotions, risk management serves to eliminate the emotional component and streamline the process. The final profit is the sum of the results of profitable and unprofitable transactions.
Why is It Crucial to Manage Risks When Trading Forex?
Developing the strategy will help solve most of the problems faced by market participants. Traders receive the following benefits due to the right risk-management methods with DotBig exchange:
- The possibility of losing the entire deposit in one transaction is excluded.
- Risk tolerance is developed, and the trader does not panic at sudden fluctuations in exchange rates and makes sober decisions.
- Transactions are concluded with the best balance of profit and risk.
- Traders become psychologically prepared for an unfavorable outcome of the transaction.
- It is possible to calculate the optimal position volume, which does not lead to a loss of capital.
Proper risk management in trading not only reduces possible losses but also increases income. But there are no quick fixes, so you’ll have to spend enough time protecting yourself. With the DotBig Forex broker, you will find the best low-risking way to earn online.
Forex Risk Types
To develop risk management strategies, it is necessary to take into account all types of trading risks that a market participant may face:
- Market dynamics. Often, the market does not meet traders’ expectations, and the exchange rate falls instead of rising. This is the most common risk.
- Liquidity. For instruments with low liquidity, it takes a long time to close orders, and the price does not meet the price requested by the trader.
- Percentage. Changes in interest rates by banks in large countries strongly affect quotes.
- Leverage. In case of unprofitable transactions, leverage does not play to the trader’s advantage, and so the dealer may lose the entire deposit.
- Ruin. If the deposit usage is calculated incorrectly, the trader does not have enough funds to maintain transactions while the quotes are moving in the opposite direction.
- Political and economic instability. If a country does not have enough funds to provide reserves, this has a serious impact on the financial sector including exchange quotes.
Forex Risk Management Strategies
What are those popular risk management methods one should master before running the first Forex deal? Here are three ones:
- Conservative
This approach minimizes losses and is great for novice traders, allowing them to keep a deposit for a long time even when trading at a loss.
In this case, the risk per trade should be no more than 0.5-1% of the deposit, and the maximum drawdown should not exceed 10% per month and 30% per year.
With this approach, the projected profit will be 30-60% per annum when opening transactions with a profit/loss ratio of 3:1 and 2:1. In the worst-case scenario, the loss-making series will amount to 10 transactions per month.
- Optimal
The strategy is suitable for traders with a modest deposit, who want to earn more and are willing to take a certain amount of risk. With an optimal strategy, the risk is 2-3%, and the maximum drawdown is 20% per month and 60% per year.
Profit can be expected at the level of 50-80% per annum. This method is more extreme than the conservative one and requires self-control.
- Aggressive
This strategy is not recommended for inexperienced Forex participants, and experienced traders take this approach only in exceptional cases. The stakes are often high in an aggressive method, but the expected profit is also high, and you have to rely more on luck than on analysis.
According to DotBig reviews, aggressive strategies are most often used by experienced ones at trading contests, where they do not risk a real deposit. In reality, aggressive players sooner or later simply lose all their funds.
The risk of a deal with an aggressive approach increases to 5-7%, and the maximum monthly drawdown can reach 100% of the deposit, and gamblers often simply go all-in.
With a successful outcome, the profit reaches 200-300% and is theoretically unlimited.
How to Develop a Risk Management Strategy?
Before starting trading on the Forex market, it is better to learn the features of various risk-management strategies. When choosing a method, consider these things:
- General financial market specifics. Consider current market conditions such as volatility, liquidity, and prevailing trends to determine the most appropriate strategy. Some strategies may work better with high price volatility, while others are more effective in stable or trending markets.
- Acceptable risk. Evaluate your risk tolerance and trading goals to determine whether you prefer a conservative long-term approach or a more aggressive short-term strategy.
- Time costs. Estimate how much time you can devote to Forex dealing on the DotBig broker site. Long-term strategies may require less active monitoring and adjustment compared to short-term ways, which involve constant analysis and fast decision-making.
Besides, any trading method requires fundamental and technical analysis. Fundamental research tools allow people to assess the overall case in the financial space. This method is necessary for long-term funding. Technical analysis allows one to calculate more accurate data and determine entry and exit points when making short-term trades.
Conclusion
Undoubtedly, Forex trading cannot be successful without using a risk management strategy.
There are various classifications of algorithms: depending on the time intervals of conducting deals, the type of analysis, the moment of opening transactions, the technical component, and others.
Any method has its advantages and disadvantages, and this must be considered from the advance. Traders should choose the most suitable strategy according to their character, budget, and time.
You can not create a strategy from scratch, but use a ready-made version as a basis. On the DotBig investments platform, you will receive the necessary support and reduce the risks when trading Forex.
And remember, you must strictly follow all the rules and principles laid down in the strategy – this is the main condition for reaching success.