Like most business and trading activities, Forex trading comes with certain risks. These risks include potential financial loss as well as potentials scams. Like most things, you have to be willing to take the risk to get the reward.
Forex trading is no different. But there are some straightforward and simple ways that you can protect yourself. Keep reading for ten ways to protect yourself when trading forex.
Related: Is Forex Investing Safe?
Protect Against Instability with Well Known Currencies
It may seem enticing to trade smaller currencies. The issue with smaller currencies is that they are not very stable. If the money is not steady, it may be more challenging to predict how it may trade in the future. Larger currencies are more watched and easy to follow.
Well-known currencies get their place in Forex trading mainly because of their strength and popularity of being traded. The strength of currency usually correlates with interest rates, inflation, and supply and demand.
The strength of the currency is also measured by how it performs against other currencies over some time.
Here are some of the most frequently traded currencies:
- European Euro
- US Dollar
- Japanese Yen
Use a Simulator to Develop Trading Skills to Protect Your Funds
As the old saying goes, “practice makes perfect.” If you are new to Forex trading or you need to refine your skills, you can sign up for a platform that offers a simulation. By using the simulation, you will be able to practice trading without the risk of losing money.
Simulation trading is a safe and effective way to master your trading skills when needed in the real world.
Forex provides a simulation account where you can trade with virtual money. A useful feature of the Forex trading simulation is that it functions off live and real market conditions. Not only are the market conditions live, but the trading strategies are also made off actual historical data. The simulation also comes with 80 currencies for you to pair.
Prevent Impulse Decisions by Sticking to a Plan
When you have tested and refined your skills, it may be time to enter real-world trading. Before you decide to enter the real world of trading, ensure that you have a trading plan. Consider the risk you are about to take when you trade and determine the signal you will use to exit a trade.
A trading plan can include your trading goals, the time you will spend trading, the amount of risk you are willing to accept, the capital you plan to use when trading, and how you will maintain market knowledge.
Without a plan, you may find yourself making decisions based on emotion or a hunch. It is strongly advised that you do not trade based on your feelings. Although instincts are reasonable, you should have a combined approach of smarts, data insights, and market news.
Document Everything in a Journal
When while trading, you may find yourself captivated with the process and caught up in sometimes daily decision making. Although the excitement and action may take most of your time, be sure to make records of your performance. It is always possible to get too busy; however, never get too busy to document and review.
Recording your activities and outcome of trades is an excellent way to see how your strategies perform. It is, therefore, advised to keep track of your actions and results. Once you have a perfect record, you will be able to review strategies and make adjustments for better future outcomes.
Never Stop Learning New Strategies
While journaling and keeping records are important, it is also encouraged that you never lose sight of ways to make improvements to your decision and strategy arsenal. If you are new to Forex trading, you should learn about the business as much as you can.
You can find articles on Forex trading as well as advice from experts. Some communities do exist for Forex traders where information and experiences are shared. These communities are not only for new traders.
Even if you are not new to Forex trading, you should continue to read and learn trading practices. Following the news is also essential to find market information to determine how you will trade. Remember, the market can be a crucial driver in the supply and demand for currency and determine strengths and fluctuations.
Play it Safe in the Beginning
Despite all the training, practice, and information you may have at your disposal, there is a reasonable amount of risk for trading in general. A good strategy you can have to start with is a modest trading capital.
Only risk what you can afford to risk. A proposed rule is only to risk at least 2% of your trading account. Markets are unpredictable, and as much as data is available and charts are used, there can still be rapid vulnerabilities.
Use a Stop-loss Safety Net
Although the markets can be unpredictable, you can still limit potential financial loss by implementing a stop-loss order. This enables you to stop trading once you hit a previously established price limit. The objective is to determine the lowest price you are willing to trade before you exit.
If your stop-loss price does not work, you can evaluate other ways to prevent failure. One reason your stop-loss price may not work is if the market has erratic fluctuations. To mitigate these fluctuations and the failure of a stop-loss price, you can determine the percentage you are willing to lose to exit the trade.
Use Hedging to Protect Against Rate Shifts
With a good understanding of how the market swings, the use of hedging can reduce your risk of loss. With hedging, you can trade the same currencies in the opposite direction. For example, you could trade USD- Euro and have another trade of Euro- USD. If you use this method, you are making it possible to win on either currency.
Hedging is recommended for traders who understand when the market will swing. Financial loss is possible if a trader fails to act when hedging. You can implement a stop-loss order on both trades to ensure you do not lose when hedging.
Increase Exposure with Leverage
Using leverage means that you can trade at high value with just a small portion of your capital. For example, you can use $1,000 to make a trade of $20,000.
Although leveraging is attractive when you win on a trade, the loss is also significant if it is high. It may be best to leverage what you are willing to lose in your capital account. It may also be best only to leverage a trade that you can easily cover if you lose.
Choose a Broker that Knows Forex
Many scams originate around Forex trading. Some of these scams take the form of brokerage firms that do not provide standard safety and services. When searching for brokerage, firms ensure that the firm is reputable and listed with a regulatory body that oversees Forex brokerages.
Forex trading is an established way to make income trading currencies. With all types of trading, there is some risk, and Forex trading is no different. You can run the risk of incurring a financial loss, and you can also run the risk of being scammed out of your money by unregulated brokers.
Although risky, there are measures that you can take to mitigate significant financial loss. Take the time to learn about Forex trading and practice simulation trades and develop a plan before entering the real market. Even when you enter the market, you need to keep abreast of current market trends. Also, ensure that you are keeping records of your trading activities to allow for future improvement.
Consider including strategies such as hedging and stop-loss orders. Leverage with caution, keep a modest capital, and ensure that you have a reputable broker.