Risk Management is one of the most important aspects of trading. Under this relatively vague term lie very strict rules that every trader must follow in order to be profitable in the long term.
Unfortunately, there is no fool proof formula to manage your portfolio without risk. Your trading style will depend on your level of risk aversion and aggressiveness towards the market. It is up to you to spend as much time as required on practice accounts in order to define a strategy that fits YOUR requirements.
Some will, for example, adopt a scalping technique that relies on taking advantage of the volatility of the rates. To do so, one will open and close trades during a very short period of time and consequently will accumulate very small profits, whilst at the same time, limiting the risk. Other traders will rather opt for a more midterm strategy, which allows transactions to run over several days, or even weeks, in order to make higher return, but with much lower frequency.
HERE ARE SOME GENERAL PRINCIPLES TO KEEP IN MIND WHILST TRADING:
In order to keep total control over your account and to minimize the risk, one of the most important rules is to use no more than 15% of your total capital, which will be couples to the leverage.
By keeping your exposure at a relatively low level, the leverage will allow you to open trades with good returns, even though you will not double your investment within days. Conversely, if your position becomes negative, the losses generated will remain at acceptable levels, even in cases of harsh volatility. You will then have the liberty to wait until your trades show profit, without putting your capital at risk.
Despite the obvious importance of profits, it is also important to remember that losses are also part of the game. It is impossible to beat the market with every trade, and even the most experienced traders will have to cash some losses from time to time. Do not be afraid of closing a negative trade if it is necessary.
It is essential to keep in mind that when trading is concerned, performances are best measured in the long term. You will always hear of people who have tripled their investment in less than two weeks, but remember: On average, Saving Accounts only return 2.25% a year, so if after one month of trading you are showing a 5% gain, you are already well on your way to becoming an excellent trader!
Many traders tend to take profits as soon as they show a 2 or 3 pip gain. Most of the time, this strategy turns out to be very efficient, and rests on the principle that “what is take, is taken”. However, that being said, if you see a very clear trend on a currency pair, it would be a shame to limit your earnings to just a couple of pips. In these specific circumstances, we would recommend for you to look for a 15 to 20 pip profit before closing your position; this way, you will take full advantage of the market conditions.