/ Currency trading risks: What are they and how to minimise them?

It can be difficult for novice Forex investors to prevent risks. The best thing to do is to learn how to recognise and avoid them where possible. It is normal to encounter difficulties in Forex trading, and it is important to know how to deal with each of these situations. Even if you find yourself in a disadvantageous position, there are always ways to minimise your losses. The key to success is to be informed. To avoid unpleasant surprises and unforeseen losses, in this article we offer you useful tips to help you trade Forex with confidence.

Risk Management

Although every trader wants to invest their money in profitable assets and not suffer losses, this is statistically impossible. Unfortunately, everyone can make mistakes, because nobody cancels the human factor. Sometimes it seems that a reasonable decision was made, and then it turns out that everything turned out not as expected. That is why it is impossible to trade without losses, but it is possible to minimise risks. To do this, it is necessary to have a risk management plan for every possible financial scenario. This means that a trader must take the necessary steps to limit serial losses when the market moves in the opposite direction. The foreign exchange market is the largest in the world and accumulates a high daily trading volume that can reach more than $5.3 trillion. Therefore, it can bring not only juicy profits but also potential losses to both private investors and huge banking institutions.

Thus, the main risk of the Forex market is the losses that occur when currency exchange rates change. Everyone involved in this type of trading must apply measures and strategies to prevent possible losses. Let's take a look at some of the risks that you cannot afford if you are just starting to trade in the Forex market. Take note of a few of the most effective tips recommended by experts.

1. Trading without a stop loss

In Forex, trading without setting a stop loss is considered the most serious risk known. Think of it like the brakes when driving a car as safely as possible - it's a must-have, right? In this sense, a stop loss is a tool that allows you to limit your losses when the market moves out of your favour. As the name suggests, it "stops losses" and therefore reduces your risk when trading Forex. It also allows you to cancel an order when the limit is reached.

A stop loss is automatically placed when a predetermined limit is reached. Remember that a small loss can turn into a larger loss if you don't have this tool.
In the case of currency trading, if you are buying a currency pair such as EUR/USD, you will want the position to close automatically when the rate moves about 100 pips against you, for example. If you have little or no experience, use a stop loss.

2. Bet on a single asset or currency pair

When you are involved in Forex trading, a little flexibility will allow for much better risk management. Any trader who, "puts all their eggs in one basket" knows that they will be in big trouble if the market does not develop as expected. In this sense, it is best to diversify your portfolio by using more than one currency pair. This way, you will reduce the risk of losing everything by betting on one asset or currency pair. The same goes for other asset classes such as equities or commodities.

A variety of currency pairs can mitigate losses on one, offsetting them with gains made on others. Diversification will also help mitigate the risk associated with high volatility, which can occur at any time. As the saying goes - it is better to be reinsured than to regret later.

3. Do not limit the use of leverage

Leverage is one of the most attractive tools in the Forex market. For both large and small investors, due to the expansion opportunities it provides to traders. In fact, leverage allows traders to make more trades than their account balance allows in order to maximise their profit on a trade. However, while leverage is hugely beneficial, it can also work against you, so you need to use it wisely.

In the foreign exchange market, price fluctuations are not very significant, so leverage is not always a risk. Remember that as much as you can gain with leverage, you can also lose if things don't go as you hoped. Therefore, it is crucial to limit it to avoid further losses and losses.

4. Not understanding the source of your losses

Undoubtedly, not understanding the source of one's losses is ultimately one of the most important factors in determining a trader's success. It is simply a matter of understanding why and how a position taken in the market turned out to be bad. If you don't take the time to analyse your mistakes, it will be impossible to correct them and this will lead to new losses that could have been avoided. This is why we always strongly advise traders to learn about how the market works in order to make better decisions. On the other hand, in many cases the mistake is not understanding the economic events that affect the exchange rate. Always try to take a step back and analyse the reason for your mistakes so that you don't repeat them in the future.

5. Failure to make corrections

Once you have identified the source of the problem, the next step is to correct it as soon as possible so that it doesn't happen again. Of course, if it's a stop-loss issue, the correction is fairly quick. On the other hand, sometimes problems are more serious than we realise. For example, it may be due to a misunderstanding of technical analysis, which will lead to a complete overhaul of your Forex strategy. You may have to step away from the market for a while, but remember that this will allow you to start again with a stronger foundation and a deeper understanding.

Don't forget that once you come back fully charged, the next step is to make sure that the adjustments you made are the right ones. Of course, they should match your trader profile or business plan. Make a note of these adjustments, test their effectiveness (use a demo account) and correct mistakes if necessary. By keeping a record of your actions, you'll be able to note changes and results to determine how well you've done. The fruits will be more than obvious.

6. Aggressive trading

Many traders tend to trade and speculate without measure, without considering losses. The best thing to do in such cases is not to get emotional and quantify the risk in relation to the capital you have set aside for currency trading. For example, if you have decided to invest $10,000 in currency trading, you must also decide how much to risk per trade. If you are cautious and conservative, you probably won't risk more than 2% per trade. In fact, this is the percentage recommended for beginners in online courses and trainings. But don't worry, you can increase this figure as you gain experience.

In this sense, by risking 2%, you are risking $200 if you lose the trade. Therefore, we always recommend not to be aggressive and risk more if you are not in a position to do so or do it too often. We don't advise you to risk more than 10%, for example, if your risk management tells you that you can only afford 2%. Always respect the limits you set and follow them to the end. Don't let your capital go to zero through lack of caution.

7. Unrealistic expectations

Another risk that often haunts Forex traders is being unrealistic. Apart from the fact that many people tend to get carried away by their emotions, they also tend to be unrealistic about the size of their trades. Unfortunately, some traders easily believe that Forex trading will turn them into millionaires overnight, that is, in a matter of weeks, and with a minimal number of trades. With this in mind, you should know that it is possible to make money, but it requires constant time and effort. If you want to make a living from this financial activity and earn a steady income, you should learn everything you need to know and do it step by step.

Traders who think they can multiply their capital 10 times or more each month simply have inflated expectations and risk losing their money by taking unreasonable risks. If you have a small capital or budget and are looking to grow it to a six or seven figure sum, it is definitely possible, as long as you get the right learning curve and put in the right amount of effort.

8. Uncovered position

Finally, one of the strictest rules taught to all novice Forex traders is to minimise losses by quickly admitting a mistake and closing a position immediately. Mistakes in trading are perfectly normal. Even the most experienced trader with a long track record can make mistakes. However, these mistakes are just bumps in the road that can be overcome if you recognise them in time and close the position before the losses become too significant. By accepting your mistakes and acting decisively, you can save your money and increase your chances of long-term trading success.

Conclusion

One of the most influential investors in the world once said: "Investing is simple, but not easy." When it comes to making a profitable investment, our minds can be an obstacle. Unfortunately, our worst enemy in Forex trading can be ourselves. Following advice can keep you from moments of instability and significant losses. Accept the fact that losing money in Forex is normal, but it is not the end of the road. The most talented and successful professional traders in the world still suffer losses, sometimes quite significant ones, but the main thing is to learn from them.