Forex Online Trading – Risk management 101

Forex Online Trading Forex online trading strategies to manage risk can become your safety net against any sudden movement that might leave you hanging from a financial thread.
The most successful forex online traders are not simply those who make the most profit. They are likely to be the ones that understand that risk is always implied in any forex online trading transaction and are able to complement their skills with risk management strategies that allow them to maintain a desired flexibility in their trading while always keeping losses to a minimum.
In this sense, protective stop orders can be considered a very important part in keeping minimal losses. In forex online trading, protective stop orders are meant to help limit your potential losses by designating a certain price at which the trade should be exited. This allows you to keep from going beyond the designated price and filled at the market price once a move has been completed.
For instance, a trader or broker can execute a protective stop by fixing a stop-loss order for 10% below what he or she invested, therefore limiting the loss to 10%.
Employing a stop order means that you have to start considering some money management principles. Forex online trading strategies often tell you to place a stop at a certain point above or below the trade. The trader, however must determine the risk limit he is not willing to cross and for most traders is 2% or less of their total trading account. Following this rule will let you trade for longer, maintain your account and become a more successful trader.
Another useful advice when creating your risk management strategy is to use the correct lot size for you. There is no magic formula when it comes to determining the proper lot size as it all depends on your experience and trading style, but a rule of thumb that applies, specially to beginners, is that the smaller, the better.
For instance, a trader or a broker can execute a productive stop by fixing a stop-loss order for 10% below what he or she had invented, therefore limiting the loss by 10%.
It’s really important for traders to understand the risk of using larger lots with smaller accounts balance. Working with a smaller lot size will allow you to acquire the flexibility and managing trading skills while getting the necessary experience to trade with bigger lot sizes. Of course bigger profits come with bigger lot sizes, but as you learn to properly use logic and rationality and to think in the long term, your account balance will allow you to trade with bigger lots.
Still, while using a reduced lot size might be a good safety strategy, it will not be very helpful if you open too many small lots. Having an overall exposure control can help reduce risk and keep you in the trading game for the long haul.
For this purpose, is important to understand currency pairs correlations. For example, if you go short on the EUR/USD pair and long on the USD/JPY, you are exposed two times to the USD and in the same direction. It equates to being long 2 lots of USD, which can be harmful for your risk strategy as you might have a double chance of losing if the USD goes down.