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Managing Risk in the Forex Market

You’re in the market to make money, but you realize there’s some risk involved. Perhaps you even enjoy the thrill of the game – the bigger the risk, the bigger the rush. Unless you have limited funds, though, you won’t be in the forex market for long. So how can you balance your need for the excitement for a big trade versus the need to make some money? Develop a trading plan that addresses both risk and reward, as shown below.

Utilize stop orders

Even before you make that first trade you should clearly define your limits. Don’t wait until you’re sitting down late at night in front of your computer waiting to place trades on your Forex system platform. Jot down on your trade journal (or whatever recording system you use) your limits for both buying and selling different currencies. If you buy USD/EUR at a certain rate, then know when to place your stop order (maximum limit) to sell. Suppose you buy USD/EUR at .6436 and you place a stop order to sell at .6422. What you’ve just done is to remove the “emotion” factor from the equation – you’re pulling yourself out of the market before you even lose more by trying to make up for the loss. Essentially, your pride is taken out of the picture.

Consider OCO (one-cancels-the-other) orders

If you want exercise control on the flip side as well (protecting your profits), then consider using the OCO order. Basically, this type of order keeps you positioned within a pre-defined range. It limits your losses while also protecting your profits. It’s used when you feel less confident in controlling your need to earn bigger and bigger profits. Here’s an example how it works.

Let’s say you buy EUR/USD at 1.5568. You want to limit your losses while at the same time protect your gains so you place the following OCO order: a sell-stop order at 1.5548 (sell euro when it reaches this rate) and a sell-limit order at 1.5589 (sell euro at this upper limit). By placing an OCO order, you’ve kept within your pre-determined guidelines.

Discipline and realistic expectations

It takes time, patience, and discipline to succeed in the Forex market. Unless you’ll really lucky, it won’t happen overnight. Be realistic with your return on investment expectations as well and you’ll have a more enjoyable experience investing in the Forex market.

Invest in the Forex market on one of the many online Forex trading system platforms available on the web today. Placing orders is extremely convenient and most online brokers don’t charge commissions outside the quoted spread.