Best Strategies to Minimize Risks in Forex Trading?
If you are keen on investing in Forex market and want to know how to get a higher return and above all, how to minimize the risks of trading then this post is highly recommended.
Before starting currency/Forex trading for the first time, it is important as an inexperienced trader to understand how the market works, and make sure that this market is the right one. Forex investments offer multiple possibilities but also have their risks, and it is important to know them and take them into consideration before trading.
Some Basics about Forex
To successfully invest in any market, it is important to know and understand it as much as possible. The Forex market is the currency market in which currencies are exchanged.
In terms of volume, it is amongst the top 3 traded investment product. In Forex market, currency pairs are traded, and one of the most popular is the Euro-Dollar pair (EUR/USD), although there are other kinds of currency exchanges.
Specifically there are three categories of currency pairs:
- Minor or Cross
Major Currency Pair: In summary, the major currency pairs are those that include the US dollar, either as a base currency or a quote currency.
Minor Currency Pair: These are smaller currency pairs, which excludes the US dollar.
Exotic Currency Pair: On the other hand, there are the exotic currency pairs that combine a major currency with a currency from an economically emerging or less important country internationally. For example from Asian or European countries outside the EU.
What are the most profitable pairs?
As there are different categories of currency pairs, it is important to know which pairs to choose, in order to get maximum return.
And although is is your decision, the three very profitable pairs are:
- Euro-Dollar pair (EUR/USD): Offers lower margin and lower volatility.
- Pound-Dollar (GBP/USD): It is quite volatile but offers good spreads.
- Yen-Dollar (USD/JPY): It offers good opportunities thanks to its low spreads.
How to minimize risk in currency trading?
Forex trading, like any investment, has its own risks. However, some are easily controllable which will be able to minimize the losses.
In order to control the risks in investments in the currency market, it is important to act in the following way.
If carrying out currency trading and are able to follow certain guidelines, it is quite probable that risk will be minimized and positive results would be achieved.
- It is important to decide the price at which you want the position to close, if the trading goes in opposite direction.
- Also control the trading by setting limits, both of loss (Stop-Loss) and of profit (Take-Profit). Basically this will help in minimizing losses and maximizing the profits.
- Regarding inevitable losses, it is important to determine a volume, and that these do not exceed 2 or 3 percent of the total investment capital.
- In the same way, it is fundamental to stop to think about the risk/benefit factor to decide if it is best, or not, to open a certain position.
In addition to the following these guidelines, in order to enjoy Forex trading with the best results, it is advisable to know how to implement different strategies.
What are the best strategies?
To invest in Forex and minimize risk, in addition to relying on spreads, when to start trading, how much to invest and how to calculate risk, it is also important to know how to implement different strategies.
Go Long Term: To minimize risk, one of the most commonly used strategies is to choose longer time frames. Small intervals are highly volatile, so choosing longer times will help to reduce this factor.
Determine Stop Loss: This also helps to minimize risks. Because if a certain price is reached, the trade will close automatically, giving protection from further losses.
Be Careful with Leverage: Also, be careful with leverage and try to keep the levels low. Because although the idea of trading with more money than available may be tempting, do not forget that the greater the leverage, greater will be the losses, if the trend changes abruptly. In this case, no one would want to lose more than they have.
Currency Correlation: Another very useful strategy, and one that many traders put into practice, is the correlation of currencies in their favor. As currencies fluctuate constantly, knowing how to interpret their correlation will help to minimize the risks.
If the correlation is high, it means that it is more variable and presents greater risk. So in this case it will be more convenient to look for a lower level of correlation, and try to diversify by trading in several pairs with the same trend.
In short, to be successful in Forex trading, it is essential to understand how the market works, follow the guidelines and put into practice possible strategies mentioned above. This way risks will be minimized and profitability will be achieved.