Money management is the key to success. Many times fundamental factors can send currency rates swinging in one direction only to whipsaw into another in mere minutes. Technical trading does not guarantee that all trades will be profitable too. So, it is important to limit your downside by always utilizing stop-loss and trading only when good opportunities arise. Here are a few specific ways in which you can manage your trading and limit your risks:
| Leverage | One of the biggest mistakes traders make is overextending themselves by using excessive leverage which puts them at risk of “account depletion” as well as a possible margin call situation and are forced to exit the market prematurely. The most important rule for using your account leverage in an intelligent manner is to allow gains and losses on your account to happen slowly instead of going for a 'homerun' and then striking out with a massive loss. |
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| Liquidity |
Although FX markets are extremely liquid, not all currency pairs have same level of liquidity especially for currency pairs of emerging markets which are usually liquid during certain hours and not 24 hours. The liquidity may also be affected by changes in regulatory policies (like Capital Controls). Furthermore, liquidity is affected by the “interest” of market makers in that particular currency pair. Beside liquidity, traders should take note on the spreads of the currency pairs. Overall, in recent years spreads have narrowed in the FX market but this phenomenon is not across all currency pairs. Generally, currency pairs which have high liquidity will have narrow spreads and vice-versa. Wide spreads may lead to missed opportunities for traders as well as add slippage on stop orders. Therefore, it is of utmost importance that one chooses a currency pair that best suits his trading style and appetite. |
| Volatility | Though FX markets are liquid, they are extremely volatile as well. It can be difficult to manage market swings. Determining the right entry and exit points become crucial in handling volatility. To enhance the accuracy of your entry and exit points, one should adopt at least two technical indicators to ascertain your judgement which will result in a harsher filter of your trade ideas. However this may inevitably result in fewer trade opportunities. |
| Stop-Loss | To limit your risk, it is essential to place a stop-loss order and stick to it. Additionally one can use trailing stop order to lock in profits and limit losses to an existing position. Placing stop-losses is especially crucial for traders who trade on margin as they are more vulnerable to sharp price movements than regular traders. Another feasible rule that one can adopt is to set a maximum loss per day that one can afford to withstand, both financially and mentally. Whenever one hits this point, stop trading. Inexperienced traders often feel the need to make up losses before the day is over and end up taking additional unnecessary risks. |
| Evaluating and Tweaking Performance | Many people get into day trading expecting to make triple digit returns every day with minimal effort. In reality, around 80% of day traders lose money. Trading through a well-defined strategy that you are comfortable with can improve your chances of beating the odds. Most day traders evaluate performance not so much by a percentage of gain or loss, but rather by how closely they adhere to their individual strategies. In fact, it is far more important to follow your strategy closely than to try to chase profits. By keeping this mindset, you make it easier to identify where the problems exist and how to solve them. |
